Capitalist Economists Debate ‘Secular Stagnation’ (Pt 2)

Recently, I have been looking at Thomas Piketty’s book “Capital in the Twenty-First Century.” Piketty, a French bourgeois economist, created a sensation by pointing out that over the last 45 years a growing proportion of national income—wages plus surplus value in Marxist terms—has been going to profit at the expense of wages. Piketty is alarmed that if this trend isn’t reversed capitalism will be seriously destabilized.

The title of his book is, of course, inspired by Marx’s great work “Capital,” though it predictably rejects Marx’s anti-capitalist revolutionary conclusions. Naturally, I was interested in what Piketty had to say about Marx.

What I found striking was that Piketty did not understand Marx at all. The reason is that he views Marx through marginalist lenses. Essentially, Piketty treats Marx as a fellow marginalist. Marx’s theory of value and surplus value, so completely at odds with the marginalist theory of value and surplus value, is literally beyond Piketty’s comprehension.

In examining the current debate about “secular stagnation” among economists like Larry Summers and Ben Bernanke, we must never forget how deep the gulf between their economic theories and Marxism really is. This is true even when their terminology is similar. This month, I will contrast the theories of two economists of the 20th century, Joseph Schumpeter and John Maynard Keynes, regarding capitalist growth and stagnation. Both men were marginalists, even if not the most “orthodox” ones, and therefore had much more in common with each other than with Marx.

Next month, I will begin to contrast their views with Marx and the views I have been developing in this blog. (1) But before we reach the “Marxist mountains” we will have to slog through the plains of modern bourgeois economics. Only when we begin to ascend into the Marxist mountains will we be able to explore whether any of the ideas of Schumpeter can be integrated into Marxism. I have already dealt with Keynes quite extensively in this blog. (See, for example, six-part series beginning here.)

Joseph Schumpeter (1883-1950) was the most famous marginalist economist to deal with the question of technological changes, or “innovation,” under capitalism. Schumpeter was an Austrian economist in the sense he came from Austria, though he spent his last years in the United States as a professor at Harvard University. He was certainly influenced by the “Austrian economists” as well as other schools of post-classical bourgeois economics current in his day. Like the Austrian economists proper, Schumpeter preferred to communicate his ideas in natural language as opposed to mathematics.

Also like the Austrians, he was a hardcore supporter of capitalism, disliked “socialism”—proposals to reform capitalism in the interest of the workers—and was an opponent of the “Keynesian revolution” in bourgeois economic theory of the 1930s. He was what would be called today a “neo-liberal.” Like the Austrian economists proper, Schumpeter took a dim view of democracy, which he was convinced would inevitably lead to socialism. Yet he was a friend of Paul Sweezy and therefore had a certain influence on the Monthly Review school.

Paul Samuelson and Paul Sweezy considered unqualified to teach by Harvard

Schumpeter defended the right of both the young Paul Samuelson, who was Jewish, and Paul Sweezy to teach at Harvard. Unlike some other young economists of the 1930s, Samuelson was a strong defender of capitalism.

Samuelson is now considered to have been the leading U.S. bourgeois mathematical marginalist economist of the 20th century. He was able to explain his ideas in both natural language and the language of mathematics. Samuelson was denied a professorship at Harvard because the U.S.’s flagship university maintained a strict quota on the number of Jews who could be admitted to the university, let alone teach there. As a result, Samuelson ended up with a professorship at nearby MIT (2).

Sweezy was an “Aryan” and therefore “racially” fully qualified to teach at the U.S.’s leading university. However, he was disqualified as far as Harvard was concerned because he was a Marxist. Indeed, with the sole exception of Paul Baran, who became a tenured professor of economics at Stanford, no Marxist was allowed to teach economics at a U.S. college in those years.

Baran was harassed by both Stanford University and the FBI with the intention of forcing him to quit. Baran couldn’t be fired outright because he was protected by tenure. But Baran held out and clung to his professorship until his death in 1964. It wasn’t until the radicalization of the 1960s that Marxist economists were allowed to teach in limited numbers at U.S. universities and colleges.

Since the late 19th century, the various schools of marginalism have dominated professional bourgeois economics. Yet marginalism, unlike Marxism, has always had a great deal of trouble explaining one of capitalism’s most important features—economic growth. Capitalism, unlike the economic systems that preceded it, is characterized by economic growth (despite being periodically interrupted by crises)—the introduction of new types of products, revolutionary changes in productive techniques, and a growth in the productivity of labor that dwarfs anything seen before.

Joseph Schumpeter considered Leon Walras, the founder of mathematical “general equilibrium” theory, as the greatest economist of all time. This view is unusual even among bourgeois economists. As I mentioned last month, Walrus pioneered the building of mathematical models based on marginalist value theory, which holds that objects of utility acquire economic value due to their degree of scarcity relative to human needs. Walras and his successors then went on to “demonstrate” through ever more elaborate mathematics that a capitalist economy tends towards an equilibrium of full employment in which all people will enjoy, within the constraints of scarcity, the maximum degree of satisfaction.

The word “equilibrium,” whether in economics or physics, defines a state where all motion ceases. Once the economy reaches its “Walrasian equilibrium,” it should reproduce itself but otherwise remain unchanged over time—that is, stagnant. (3)

Yet, what most impressed Schumpeter about capitalism was that it is marked by dynamic growth and development. Schumpeter believed that what saved capitalism from the stagnation of Walrasian equilibrium was what he called “innovation.” Innovation he defined as the commercialization—not the mere invention—of new technologies and products. And the agent of innovation is, according to Schumpeter, the entrepreneur—or active capitalist. Classic examples of Schumpeterian entrepreneurs would be Thomas Edison, who commercialized electrical power; Henry Ford, who commercialized mass-produced cheap automobiles; Bill Gates, who commercialized computer software; and Steve Jobs, who commercialized modern computer-based devices.

Unlike Alvin Hansen, Schumpeter did not believe that the Great Depression indicated that capitalism was facing permanent stagnation. Schumpeter attributed the depression and stagnation of the 1930s to two factors: First, capitalist innovation that drives growth is inherently cyclical. Innovation is not a steady or even a random process but comes in waves that create complex cyclical patterns. Second, these waves of innovation cause three distinct “business cycles.” One is the short-term “Kitchin cycle” that runs its course in three years. The other two are the 10-year “Juglar cycle”—Marx’s industrial cycle—and the 50-year “Kondratiev cycle.”

According to Schumpeter, every once and in awhile the troughs of all three cycles coincide. This, he believed, is what happened in the early 1930s producing a particularly nasty depression. The factor that Schumpeter believed caused the depression to linger on through the decade of the 1930s was the “anti-capitalist” spirit of the New Deal. All the same, Schumpeter was optimistic the following decades would see a return to capitalist prosperity as new waves of entrepreneurial innovation created new cycles of growth, not the continued secular stagnation that Hansen feared.

But how exactly does innovation lead to economic growth? According to marginalist economics, “goods”—notice the term “goods,” not commodities—acquire value to the extent that they are scarce. Marginalism itself is only a mathematical method of analyzing scarcity. Both the classical economists and Marx used the marginalist method in analyzing differential ground rent, which arises because fertile land is scarce. However, the classical economists and above all Marx did not see value as arising from the scarcity of objects of utility. Rather, they saw it arising from the labor necessary to reproduce them. This is the central difference between marginalism and Marxism.

For the marginalists, if scarcity comes to an end, “goods” will lose their value, economic growth will end, and logically capitalism itself should end. But most bourgeois economists—John Maynard Keynes (4) was something of an exception—insist that scarcity is eternal because human needs are infinite. Therefore, the vast majority of modern bourgeois economists insist that scarcity, value and capitalism are all here to stay. In their own way, marginalists sense that capitalism can only exist if capitalism continues to grow economically.

But as production keeps growing, what keeps scarcity alive? The economists see essentially two forces that maintain scarcity. One is population growth, and the second is the creation of new types of commodities—Schumpeter’s innovation. Different bourgeois economists stress one or another of these two basic forces. Schumpeter emphasized innovation, while Keynes stressed population growth.

In marginalist theory, means of production—capital goods—acquire value indirectly because they are necessary for the production of items of personal consumption. The “scarcer” the items of personal consumption are, the scarcer the means of producing them will be as well. This will give capital goods scarcity value. And what makes up capital? Capital goods do. The word capital in marginalist theory is simply a short hand for “capital goods,” or means of production. And what is the price of capital? It is, as every elementary economic textbook explains, the rate of interest.

Schumpeter saw innovation as the main breeder of scarcity. But how does innovation create scarcity? The marginalists reason something like this: Before automobiles were invented in the late 19th century, there was no question of a shortage of automobiles because automobiles did not exist. There could be a shortage of carriages and horses, and therefore these “goods” could possess a positive marginal utility—to use the terminology of the early marginalists—for the consumers. But a nonexistent “good” like an automobile could not have a marginal utility—value.

But by the end of the 19th century, the automobile had been invented. True, these early automobiles weren’t very good by later standards. They could go only a few miles—or kilometers—per hour and would frequently break down. In addition, their engines could only be started by cranking them, which could break the user’s arm. And the vast network of gasoline stations and modern “freeways” that make modern automobile transportation possible, if not always pleasant, did not yet exist.

Once the first primitive automobiles were invented, the job of the entrepreneurs began. Their job was to create a need for the new type of commodity—the automobile—making automobiles “scarce,” that is valuable. Indirectly, the means of making automobiles would also be made scarce, and therefore these means too would acquire a value—yield interest and profits to their owners.

It took a while, of course, but the entrepreneurs through advertising and other methods—such as using their growing political power to deliberately destroy much of the public transportation network while getting the government to spend huge amounts of money creating a vast network of highways—succeeded in creating an ever-growing need for automobiles. This occurred first in the United States, then Europe and later Japan, and among the better off part of the population in the oppressed countries as well.

In the United States by the 1920s, the automobile had replaced the railroad—an invention of the early 19th century—as the driving force of the U.S. economy. After World War II, this became the case in (Western) Europe and Japan as well.

‘Creative destruction’

The development of new industries is often accompanied by the decline of established ones. For example, the automobile industry effectively destroyed the carriage industry and sent the railway industry, the technological marvel of the 19th century, into decline.

More recently, we saw how the development of modern microcomputers devastated much of the established mainframe and mini-computer sectors in the 1990s. IBM itself faced massive losses, and in the 1990s “Big Blue” was fighting for survival.

Today, traditional desktop and laptop computers are being challenged by tablets and smart phones. Individual firms that can’t keep up with the innovation “gales” go bankrupt. Apple Computer itself almost went under in the 1990s before rebounding to become the world’s largest corporation in terms of stock market value with its introduction of computer-based devices such as the iPod, iPad, iPhone and now the Apple Watch. Schumpeter called this process “creative destruction.”

But what happens if the well of innovation runs dry? This might happen if nothing new is invented. Perhaps everything that can be invented has already been invented. Or if there are inventions, perhaps there might be for some reason a lack of entrepreneurs to commercialize them. Perhaps changing social values—the growth of anti-capitalist sentiments and growing democracy, for example—might discourage young people from becoming entrepreneurs. To take a contemporary example, what if Che Guevara rather than Steve Jobs becomes the inspiration for young people. Wouldn’t this bring the whole process of innovation and creative destruction to an end? This is what worried Schumpeter.

John Maynard Keynes, population growth and the steady-state economy

John Maynard Keynes believed that the era of economic growth was coming to an end. Keynes came out of the Alfred Marshall school of marginalism. The English Marshall tended to combine the “new marginalism” with the ideas of post-Ricardian English political economy. His marginalism was less pure than the Austrian and Walrasian schools influencing Joseph Schumpeter. Keynes was impressed by the pre-marginalist economist and Ricardo opponent Thomas Robert Malthus. According to Keynes, it was rising population that created scarcity. As long as the population grew, he believed, the economy would grow as well.

Up to a point, Keynes believed that was a good thing. However, he also believed that if population continued to grow unchecked, the result would be the disaster foreseen by Malthus. Therefore, according to Keynes, economic growth is not eternal and will eventually have to end if humanity is to avoid a Malthusian disaster. To Keynes, unchecked population growth was the single greatest danger confronting our species.

By the 1930s, in Britain and the other imperialist countries, population growth had slowed, which Keynes saw as a hopeful development. He believed humanity was approaching its optimum population level and that soon all material human needs would be fully meet. Beyond that point, economic growth would be pointless.

The problem, according to Keynes, was that on the way to the society of abundance and a stable population a crisis of mass involuntary unemployment had appeared. However, he believed that this crisis was a mere “technical” problem that could be corrected within the framework of the existing system of capitalist private property. There was no need for a social revolution. I have examined Keynes’s views already in this blog, but let’s briefly review them here in order to contrast them with the views of Schumpeter.

In his “General Theory of Employment, Interest and Money,” first published in 1936, Keynes defined economic equilibrium—neither growth nor recession—as a situation where the rate of interest and the rate of profit entrepreneurs expect on new investments—called by Keynes the marginal efficiency of capital—are equal.

The use of the marginalist method by Keynes here is significant. It shows that he accepted the view that the value of capital arises from the scarcity of the “goods” that it produces. From the entrepreneur’s point of view, once the marginal efficiency of capital and the rate of interest are equal it makes no sense to carry out new investment—increase productive or commodity capital in Marxist terms—because just as much money can be made buying “risk-free” government bonds.

If on the other hand, the marginal efficiency of capital is higher than the rate of interest, the economy will expand—economic growth. If the marginal efficiency of capital on new investment is less than the rate of interest, the economy will contract—recession.

Unlike the “Austrians,” Keynes did not believe in a “natural rate” of interest. He simply assumed that the rate of interest and the rate of profit tend toward equality—equilibrium, where the economy is neither expanding nor contracting. Indeed, at least in the “General Theory,” Keynes, unlike most other marginalist economists, saw the interest on money capital as arising from the scarcity of money, while the rate of profit arises from the scarcity of “capital goods.”

Therefore, according to Keynes’s logic, the economy—assuming a fixed population—has an inherent tendency toward a no-growth equilibrium. According to Keynes, such a stagnant equilibrium would not be a bad thing as long as it is combined with full employment of both workers and machines. However, as long as population growth is still positive it is necessary to have economic growth to meet the needs of an expanding population. So, following along with the logic of Keynes, in this case the most desirable situation is a rate of interest that is somewhat below the marginal efficiency of capital—promoting economic growth.

What should be done, from a Keynesian point of view, if the economy is in equilibrium and the rate of interest equals the marginal efficiency of capital and there are idle workers and machines? The “monetary authority” should increase the money supply in order to make money less scarce and thus lower the rate of interest. Unlike the Austrians, Keynes did not believe that there was a danger that the rate of interest would fall below some “natural rate” leading to lopsided production.

Now, though the marginal efficiency of capital was the same as before, the rate of interest will fall below the marginal efficiency of capital and the equilibrium-stagnation will be broken. Investment will rise and unemployment—both of workers and machines—will fall. According to Keynes, increased investment leads at first to a rise in the rate of profit and the marginal efficiency of capital. Eventually, however, the rate of profit and with it the marginal efficiency of capital will fall as the increasing quantity of “goods” reduces the scarcity both of the “goods” themselves and the means of producing them—capital. According to Keynes’s marginalist theory of value, this will lead to a fall in the rate of profit and marginal efficiency of capital.

Eventually, the economy will reach a new equilibrium—marginal efficiency of capital again equal to the rate of interest. Keynes believed that if there are still idle workers and machines, the monetary authority should print additional money until the rate of interest and the marginal efficiency of capital equalize at full employment of both machines and workers.

This is in contrast to the Austrian economists, who believe that there is a natural rate of interest, and lowering the market rate of interest by printing more money leads to lopsided production and eventual crisis. Today’s professional economists—or at least macro-economists who concern themselves with these questions—tends to be divided between neo-liberals, who lean towards the Austrian view, and “progressives,” who lean towards the Keynesian view.

To return to Keynes, what would happen if the monetary authority keeps printing money beyond the point of “full employment” of machines and workers? Since industrial production cannot be quickly increased, production will be fixed in the short run. Under these conditions, any rise in demand will not stimulate production but will cause prices to rise—inflation.

Keynes believed that the monetary authority should increase demand somewhat beyond “full employment” because “a little inflation” will reduce real wages as opposed to money wages. Moderate inflation will help keep real wages low enough to ensure full employment of the work force because inflation will prevent real wages from rising above the value that labor of even the least skilled workers who desire employment are able to produce.

Many “labor Keynesians” and “left Keynesians” play down or even suppress this element of Keynes’s economic thought, though it is central to his argument. When in the name of Keynes they advocate inflationary policies like devaluing the currency and urging the central bank to follow an easier monetary policy to encourage “a little inflation,” they fail to explain that according to Keynes these policies are supposed to work precisely through lowering real wages.

Keynes believed that in the past—especially before 1914—the gold standard often got in the way of interest-lowering “full employment” policies. Under the gold standard, the central bank first had to make sure that its reserves were sufficient to meet any likely demand for gold by its banknote-owning creditors. Therefore, in those days, fighting crisis, depression and unemployment took a back seat, if it was on the radar at all. For that reason, Keynes “hated” gold—like many other marginalists as well—and wanted to go over to a system of paper money much like the one we have “enjoyed” since 1971.

Assuming that the gold standard was ended, Keynes believed that achieving “full employment” would be quite easy as long as interest rates—and the marginal efficiency of capital—were high. Under these conditions, monetary policy would be sufficient to ensure “full employment.” We could call this “monetary Keynesianism.”

But what happens if the rate of interest is extremely low—like it was in the 1930s and is again today and there is still considerable unemployment of workers and machines? Creditors are not likely to pay people to borrow from them, after all. As the economists say, interest rates are “zero bound.”

As we have seen, Keynesian theory holds that low interest rates mean that the capitalists’ expectations of profits on new investments in either productive or commodity capital are low. This is all well and good if there is “full employment.”

But what if a considerable portion of both workers and machines are idle combined with a low rate of interest? The economy will be in equilibrium—the rate of interest will equal the marginal efficiency of capital. Industrial capitalists have no incentive to increase production and employment or to carry out new capital investments beyond replacing worn out means of production. Nor do the commercial capitalists have an incentive to increase their inventories. The economy is stagnant.

The result will be chronic unemployment. This is the dread “liquidity trap,” which if it becomes more or less permanent will mean secular stagnation. And according to Keynes, the richer society is the more likely are liquidity traps—stagnation with mass involuntary unemployment.

In practice, Keynes believed equilibrium of less than full employment would express itself through the fluctuations in the “trade cycle,” as the English call the industrial cycle. The economy at any given point in time will be unlikely to be in prefect equilibrium. Interest rates will either be below the marginal efficiency of capital—prosperity—or above it—recession. However, Keynes believed, the industrial cycle will fluctuate around the equilibrium point where interest rates and the marginal efficiency of capital are equal and the economy is neither expanding nor contracting.

To Keynes, the trade cycle was secondary. What was important was whether or not there was “full employment” at equilibrium when the economy was neither expanding nor contracting. It would be expected in even a healthy capitalist economy—defined as one with a full employment equilibrium—that there will be unemployment during the recession phase of the trade cycle. But under those conditions, unemployment will be short lived and will disappear as prosperity quickly returns. However, in an economy stuck at an equilibrium of high unemployment, significant levels of “involuntary unemployment” will persist even at the peak of the trade cycle—though it will be still lower than at the bottom of the cycle. It was the long-term chronic mass unemployment that persisted across the trade cycle such as Britain had experienced during 1920s and 1930s, and not the occasional recession, that most concerned Keynes.

Traditionally, pre-Keynesian marginalists—including the younger Keynes—had assumed that “full employment” was the only possible economic equilibrium. Essentially, they believed that a liquidity trap, at least for any significant period of time, was impossible. If interest rates equal the rate of expected profits on new investments but the economy was not at “full employment,” it was believed that nominal prices and wages would fall, causing an expansion of the real money supply leading to lower interest rates. This would continue until “full employment” returned.

Therefore, the economists believed, only an equilibrium at “full employment” was a true equilibrium—the state that a capitalist economy was always tending towards. In the “General Theory,” Keynes broke with this view held by most of the professional economists of his time and still supported by neo-liberal economists today.

The British have a much longer and richer history of economic thought than any other country. While as far as most professional economists are concerned, real scientific economics began with the marginalist revolution of the late 19th century, this was not Keynes’s view. He also had a curious instinct for gathering up everything that Marx (and Ricardo) considered incorrect in pre-marginalist English political economy. This is ignored by those Marxists who insist that Keynesian economics is more or less consistent with Marxism.

In the background, Keynes had in mind Adam Smith’s old theory that the price of a commodity is determined by the sum of the revenues that are necessary to produce it. According to Smith, as I already mentioned, the revenues that add up to the value or price of a commodity are the wages of labor, profits of capital, and rent of land. If you increase wages, Smith, and later Malthus and then Keynes all reasoned, you increase the prices of commodities (5).

Modern economists view the landowner as a kind of capitalist. Otherwise, it is hard to justify the rent of land. The worker (the capitalist economists always add that an entrepreneur is a worker) along with nature actually produces the wealth, while the (money) capitalist “abstains’ from consumption thus somehow producing “interest”—surplus value.

But what about the landowners? Well, the modern economists say, it is actually hard to separate landed property—unimproved land owned by the “pure landlord” from the landed capital—improved land—owned by a capitalist. Where in the world, the economists say, can we find unmodified land these days? Therefore, we can treat the landlord as a capitalist whose “abstention” makes the improvement of land possible.

Ground rent is then merged with interest and disappears as a separate economic category—fraction of surplus value—that has to be explained away. Therefore, Adam Smith’s old theory that the value of commodities is determined by the sum of the wages, profits and rents that went into producing them becomes: The prices of commodities are determined by the wages of the labor used in producing them plus accrued interest. We arrive at Piero Sraffa’s interest-bearing “dated labor” determining equilibrium prices—prices of production—of commodities. Therefore, assuming that the rate of interest added on to the money wage in determining the price of commodities is fixed, a rise in money wages will cause prices to rise, while a fall in money wages will cause prices to fall.

Workers rebel when money wages are cut

Keynes was well aware that if capitalists attempt to lower money wages workers tend to resist and often go out on strike. No doubt Keynes had in mind the English General Strike of 1926, which until today is the high water mark of the British workers’ movement. It caused widespread fears among the British ruling class
that something like the Bolshevik revolution of 1917 would occur in Britain as well.

However, Keynes observed that the workers are far slower to demand higher money wages from the bosses when prices rise. And even if the workers were willing to trade lower wages for “full employment,” Keynes believed that lower wages simply end up lowering prices leading to real wages that remain too high for full employment. Therefore, Keynes stressed, in times of unemployment it is necessary to lower the real wages of the workers, not their nominal wages.

In addition, Keynes believed interest rates are increasingly “sticky” as they approach zero. The result, according to Keynes, is that the economy can be in equilibrium—cease to grow—while considerable amounts of unemployment and excess capacity exists. The closer the economy comes to abundance—itself a very good thing—the lower the rate of profit and the marginal efficiency of capital.

Therefore, the richer society becomes the lower the rate of interest has to fall in order to achieve full employment at the equilibrium point where the marginal efficiency of capital is equal to the rate of interest and the economy neither expands nor contracts. This was the Keynes version of the theory of secular stagnation—and helped inspire Hansen’s version.

In the late 1930s—between the Roosevelt recession and the onset of the World War II war economy—Keynes remained far more optimistic about the future of capitalist society than did Hansen. Unlike Marx, Keynes believed that capitalism would eventually settle down to a “steady state” of simple reproduction. According to Keynes, the rate of interest and with it the marginal efficiency of capital would, once the population leveled off and scarcity disappeared, fall all the way to zero. The equilibrium point would now be a zero marginal efficiency of capital and a zero rate of interest. The money capitalists would disappear, and there would no longer be idle money capitalists living off interest. In this future society of abundance, everybody would be a “worker.”

True, in this Keynesian vision some workers would still toil in the fields, factories and mines—the “boorish proletariat”—while other “workers”—the intelligentsia—would have occupations more befitting gentlemen, for example entrepreneurs, government ministers, directors of the Bank of England, members of parliament, professors of economics at Cambridge, and so on. And the entrepreneurs would still earn higher “wages”—which most people would consider to be profits—than the “boorish proletariat”. But Keynes believed that the gap between these incomes and the wages of ordinary workers, though still wide, would narrow.

In the Keynesian utopia, the economy would be in equilibrium, the rate of interest would equal the zero marginal efficiency of capital, though individual entrepreneurs could still make profits by introducing new products—which presumably would be balanced out by losses of other entrepreneurs who would not find buyers for their new products or because their old products would no longer sell. But on average, entrepreneurs would not make any money beyond the “wages” that were due them. The prices of commodities would then be proportional to the wages—including of course the wages of the entrepreneur—that were spent producing them, rather than proportional to wages plus interest, since interest would be zero.

In Saffrian terms, it would no longer matter how “dated” a particular unit of labor was since dated labor no longer yielded interest. Keynes believed that this economic utopia of a capitalism with zero growth, zero rate of profit and zero interest rates without money capitalists could be achieved within 30 years from the time he was writing—that is, by the 1960s.

Keynes’s ‘labor theory of value’

Once the marginal efficiency of capital and interest rates fell to zero, profit/interest would have no role to play in determining the prices of “goods.” Instead, the prices of goods would coincide with the wages of the workers—including those of the “entrepreneur,” Keynes stressed—that were necessary to produce them. And so the prices of commodities would be proportional to the wages of the labor that went into producing them. (6)

The task confronting economic policy makers was to guide the economy from a state of growth and scarcity of the past to a state of abundance with zero population and economic growth. The challenge confronting policymakers and central bankers would be to avoid mass unemployment during the transition. Keynes believed that considerable government-financed spending would be necessary during this transitional period. He believed vestiges of the international gold standard that had survived the “Great War” and the super-crisis of 1929-1933 should be abolished. He was disappointed that under the reformed international monetary system that came out of the 1944 Bretton Woods conference, attended by Keynes, gold still retained a central role.

If, Keynes believed, the central bank could not lower interest rates any further and unemployment persisted, the government should not hesitate to engage in large-scale deficit spending and public works programs that would increase demand and therefore profits. It is this aspect of Keynesian theory that many in the trade union movement and the left find attractive. According to Keynes (and Kalecki), increased government jobs and payments to the unemployed and poor directly benefit the worst-off elements of society but also benefit the capitalists by reviving their markets and therefore increasing their profits. In this way, the interests of the two contending classes of modern capitalist society are reconciled in the final stages of capitalism.

For Keynes, the capitalism of his day was like an airplane circling for a landing and steadily losing altitude. The pilot’s job is to land the plane without a period of mass unemployment ending in a “crash landing”—a revolution that would overthrow Keynes’s beloved ruling class. True, large-scale government spending might mean lower economic growth than in the past, but that would not be a problem because the need for economic growth was ending anyway.

Next month I will contrast the views of bourgeois economists like Schumpeter and Keynes on economic growth and secular stagnation with those of Marx.


1 Both Keynes and Schumpeter through Paul Sweezy have influenced the Monthly Review school. Sweezy held that the natural state of monopoly capitalism was stagnation, and he traced the beginning of the monopoly era back to the 1870s. Between the 1870s and the beginning of the Depression era of stagnation in 1929, the U.S. economy, especially, experienced tremendous growth. If the natural tendency of monopoly capitalism is stagnation, how did U.S.—and world—capitalism manage to grow rapidly between the 1870s and 1929 without huge government budgets—except during the war economy of World War I—and to absorb “the surplus”—idle money capital seeking investments?

Sweezy believed that the natural tendency toward stagnation of the U.S. economy was overcome by two huge innovations. Between the 1870s and the crisis of 1907, the driving innovation was the railroad. Of course, the railroad was actually first introduced in the early 19th century during the era of competitive capitalism, which according to Sweezy did tend toward growth, not stagnation. But the continued growth of the railroads up to 1907 saved the U.S. economy from a 1930s-type depression during the first decades of the monopoly capitalist era.

After 1907, the great expansion of railroads ended, and after a few years of developing economic stagnation just before World War I the ball was taken up by the automobile. Automobiles provided opportunities to absorb “the surplus”—not only in automobile production proper but in the auto parts business, gasoline stations, highway construction, and demand for many other types of commodities generated by the whole process of “suburbanization” made possible by the automobile. However, after 1929 even “automobilization” was insufficient to absorb “the surplus,” and the U.S. and world capitalist economies sank into stagnation and were only saved from permanent depression by the huge military budget beginning with the World War II war economy.

However, Sweezy did not rule out that some future technological revolution like the automobile or the railroad might make a new boom without a huge military budget possible, though this was not certain. This belief that it is great revolutions in technology and consequent demand for both old and new types of commodities produced by revolutionary innovations reflected the influence of Schumpeter on Sweezy and the Monthly Review school. Sweezy, however, did not agree with Schumpeter that the epoch-making innovations like the railroad and automobile come in cycles. He therefore rejected Schumpeter’s theory that the debacle of 1929-1933 was caused by the Kondratiev, Juglar and Kitchin cycles turning down at the same time.

Sweezy, a left-wing supporter of the New Deal, also rejected Schumpeter’s claim that the lingering depression conditions after 1933 had anything to do with the alleged “anti-capitalist” spirit of the New Deal. Sweezy as a socialist was all too aware that the spirit of the New Deal was not “anti-capitalist” at all. The New Deal, Sweezy argued, especially in his later years, aimed at saving capitalism by introducing long overdue reforms. (back)

2 While Harvard is a primarily liberal arts university, the Massachusetts Institute of Technology, located right down the street from Harvard, emphasizes science, mathematics, computer science, and technology. Harvard’s restrictions against Jews was dropped after World War II, but by then Samuelson was well established as the leading light of MIT’s economics department and there he remained until his retirement. (back)

3 This is curiously echoed by the claim of the Monthly Review school that the natural state of monopoly capitalism is stagnation. However, Marx held that capitalism was a dynamic growing system, which can only exist in the form of expanded reproduction. Much more on this next month. Sweezy and Baran and other leaders of the Monthly Review school reconciled these two views by holding that while the natural state of competitive capitalism is growth, the natural state of monopoly capitalism is stagnation. (back)

4 Keynes was a “stagnationist” in a double sense. He believed that capitalism was in danger of falling into a situation of permanent unemployment of workers and machines. But he also foresaw the approaching end to the era of economic growth. Unlike the majority of bourgeois economists, he did not see permanent growth as either necessary for the continuation of his beloved British class society or eternal. In contrast, Schumpeter hated stagnation and hoped that dynamic capitalism would continue as long as possible, though he expected that democracy would inevitably lead to socialism and stagnation.

It is tempting to see the conflicting views of Keynes and Schumpeter as arising from the contrast of an increasingly stagnant British capitalism and the far more dynamic capitalism of Germany that Schumpeter came from. Britain, the pioneer of industrial capitalism, has from the end of the 19th century been the pioneer of capitalist decline and decay. (back)

5 Smith believed that the quantity of labor determined the value—or the natural price—of commodities before “the accumulation of stock”—that is, before the splitting up of society into capitalists and workers. But once capitalism proper developed—the division of commodity producers into capitalists who live on profits and wage workers their wages—natural prices—values—are determined by the equalization of the rate of profit.

So what then, according to Smith, determines the values, or natural prices, of commodities under capitalism? He wavered. In some places, he said it was the “labor commanded” by a commodity that determines its value. In other places, he put forward the view that under capitalism the value of a commodity is determined by the sum of the three revenues necessary to produce it, namely wages, profits and ground rents. Smith then drew the conclusion that if wages rise, the total value of commodities (wages plus profit plus rent) will also rise. This view was rejected by Ricardo and Marx, who pointed out that—all things remaining unchanged—if wages rise profit plus rent—surplus value—will proportionally decline leaving the general price level unchanged. (back)

6 Is this view really compatible with Marx’s law of labor value? First, Keynes made no distinction between labor and labor power. Essentially, Keynes was saying that the cost of wages, which he emphasizes includes the wage of the entrepreneur, and profits—rent being considered part of profit—determines the value or equilibrium price of the commodity. If profit disappears, then the cost of wages alone will determine the value of commodities. But as long as scarcity continues, profits have to be added to wages to determine the value of commodities. Ricardo and Marx, in contrast, believed that it was the quantity of labor that determined the value of commodities under a growing capitalism where profits have very far from disappeared. In reality, there is little in common between the Keynesian and Ricardian, let alone Marxist, labor theories of value. (back)


One thought on “Capitalist Economists Debate ‘Secular Stagnation’ (Pt 2)

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.