The Ideas of John Maynard Keynes (pt 2)

Keynes on the ‘classical’ marginalist economists

In Chapter 2 of his “General Theory of Employment, Interest and Money,” Keynes provides a summary of the theories of those he called the “classical economists.” Though Keynes uses the same terminology that Marx uses, Keynes is referring to the “classics” of marginalism, not the classical economists in Marx’s sense of the term.

To Marx, the classical economists were those pre-1830 bourgeois economists who lived in a time when the contradiction between the capitalist and working classes was still underdeveloped. Therefore, the bourgeois economists were still able to analyze the laws of capitalist production scientifically, rather than merely apologetically.

Keynes’s “classical economists” were the “classics” of marginalism, especially Keynes’s own teacher Alfred Marshall (1842-1924). In his critique of the “classical” marginalist doctrine, Keynes did not dump marginalism and return to anything like classical economics in the Marxist sense. Instead, he gave marginalism a facelift so it would no longer be in such obvious contradiction with capitalist reality, especially the reality of the Depression years. Keynes’s main aim was to develop a form of marginalism that could explain the existence of persistent mass unemployment under capitalism.

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The Ideas of John Maynard Keynes

The ideas of the English economist John Maynard Keynes, 1883-1946, achieved their greatest influence during the 1960s and early 1970s. In those days, Keynes was widely credited by his followers among the economists for saving capitalism itself.

The story told by the Keynesian economists went something like this. In the dark days of the Depression of the 1930s, capitalism to all appearances was approaching the end of its road. When the Depression began, the traditional liberal economists, who had long dominated the economics profession, claimed that capitalism would quickly recover from depression without government intervention. Therefore, these economists urged the government to do virtually nothing to encourage economic recovery.

After all, the traditional economists argued, this had always worked in the past. Recovery had always followed recession. But the Depression of the 1930s, the story goes, was different. The economy was showing no signs of recovering on its own. As a result, many young people, including a certain number from the ruling capitalist class itself, were turning toward Marxist ideas. The replacement of capitalism by socialism seemed increasingly likely in the near future.

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Ricardo’s Theories Challenged by the Crises of 1825 and 1837

Shortly after Ricardo’s death, the crisis of 1825, the first global crisis of overproduction, swept over Britain. In 1837, a second global crisis erupted with far more devastating results. It was followed by years of industrial depression and mass unemployment. Stormy class struggles broke out, and in Britain out of this came the Chartist Movement, the first mass working-class political party. It was during the depression that followed the crisis of 1837 that Marx and Engels were themselves radicalized.

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The Phases of the Industrial Cycle (pt.4)

From boom to crisis

Marx sometimes called the stage of the industrial cycle just before the outbreak of the crisis the phase of fictitious prosperity. The economy is going gang-busters, the rate of profit appears to be high, and the mass of profit keeps growing. Unemployment compared to all other phases of the industrial cycle is very low and still falling. At long last, the balance of forces on the labor market are beginning to tilt in favor the working class.

But the continuation of the boom now depends on the increasingly unsustainable inflation of credit. As long as debts can be “rolled over” rather than paid, and terms of payment can be further extended, the boom can go on.

Later, after the boom’s inevitable collapse, the recriminations fly. Why was “regulation” so lax? Why were so many derivatives and exotic credit instruments created? How could so many loans have been extended to people who couldn’t possibly repay them?

But those questions will be asked later. While the phase of fictitious prosperity lasts, it can only be maintained by progressively eliminating regulations designed to prevent the reckless extension of credit and instead encouraging “financial innovation” to unfold without hindrance.

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The Phases of the Industrial Cycle (pt. 3)

The real industrial boom begins

The boom phase of the industrial cycle is of particular interest for crisis theory. It is only during the boom that capitalist expanded reproduction develops with full vigor. Therefore, it is the boom that develops the contradictions inherent in capitalist production to the point where they can only be resolved—only temporarily as long as capitalist production is retained—by a crisis.

I explained in the last post that during the phase of average prosperity, excess capacity is whittled away at both ends, so to speak, by the closing down of factories that will never again be profitable, and the reopening of factories and machinery that after write-downs can once again yield to the industrial capitalists the average rate of profit.

As the margin of excess capacity shrinks, the percentage of industry that is lying idle is reduced to such an extent that the industrial capitalists are forced to undertake massive investments in new factories packed with state-of-the-art machinery. The industrial capitalists do not want to see their margin of excess capacity shrink to zero. They want to maintain a certain margin of excess capacity so production can be quickly increased to meet any sudden rise in demand.

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The Phases of the Industrial Cycle (pt. 2)

How recessions end

During recessions, inventories—commodity capital—are run down as production declines faster than sales. At some point, therefore, industrial production will begin to rise, because the industrial capitalists have to rebuild their inventories. This is why all recessions eventually end.

The recovery begins first in Department II—the department that produces the means of personal consumption. The contraction in industrial employment more or less comes to a halt once rising industrial production caused by the need to rebuild inventories begins.

However, industrial employment rises very little during the first phase of the upturn. Many factories during the recession were forced to operate at levels far below their optimum level of productivity. As inventory rebuilding proceeds, more factories come closer to their optimum utilization levels. The resulting surge in productivity enables the bosses to increase production considerably while adding few, if any, workers. Therefore, for a considerable period of time after the recession proper ends, labor market conditions continue to favor the industrial capitalists over the workers. This remains true after the rise in the rate of unemployment begins to taper off.

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The Phases of the Industrial Cycle

The crisis, sometimes called the “recession,” marks the end of one industrial cycle and the beginning of the next one. Recession is characterized by a decline in industrial production and employment. The decline in employment is most severe in the industrial sector but affects many other sectors of the economy as well. The recession, or industrial crisis, ends when industrial production reaches its lowest point.

The period between the lowest point of industrial production and when industrial production again reaches the highest point of the preceding cycle is known as the “depression,” or sometimes the phase of “stagnation.”

The phase of the industrial cycle that follows the end of the depression, or stagnation stage, is called the period of “average prosperity.” There is still considerable unemployment of both workers and machines, and capital investment is still weak. Stagnation and depression conditions therefore linger longest in the industries of Department I, the sector that produces the means of production.

After the period of average prosperity comes the boom. Industry is operating as close to “full capacity” as it ever does—outside of all-out war—under the capitalist mode of production. Unemployment sinks to its lowest level of the cycle. Conditions become more favorable to the sellers of labor power. This is the most favorable point in the industrial cycle for union organization and strikes.

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