Are Marx and Keynes Compatible? Pt 4

The Keynesian revolution in economic policy

Before Keynes, neo-classical marginalist economists believed that capitalism was stable if left to its own devices. These economists held that a capitalist economy tended strongly toward an equilibrium at full employment of both workers and machines. Therefore, if a recession were to occur the response of the authorities should be pretty much confined to having the central bank lower the discount rate. Otherwise, the government should stay out of the way. As long as it did, the marginalists claimed, the capitalist economy would quickly move back to its only possible equilibrium position, “full employment.”

The events that followed World War I, especially the U.S.-centered Great Depression of 1929-1941, discredited this view. Under the influence of Keynes—and more importantly the Depression itself—most of the new generation of (bourgeois) economists believed that it was now the duty of the capitalist government to actively intervene whenever recession threatened.

Bourgeois economics split in two. One branch, purely theoretical, is called “microeconomics.” Microeconomics is simply the old marginalism. The branch that emerged from the Keynesian revolution is called “macroeconomics.”

Macroeconomics tries to explain the movements of the industrial cycle. More importantly, it seeks to arm the capitalist governments and “monetary authorities” with “tools” that will keep the capitalist economy from sinking again into deep depression with the resulting mass unemployment. The new stance of the bourgeois economists was that if the capitalist governments and their monetary authorities use the “tool chest” provided them by macroeconomics correctly, they should be able to maintain “near to full employment with low inflation.”

Full employment was defined by this new generation of (bourgeois) economists not the way workers would define it—everybody who desires a job can quickly find one—but rather as a level of unemployment sufficiently high to keep the wage demands of the workers and their unions in check but low enough to prevent wide-scale unrest that could lead to working-class radicalization and eventually socialist revolution.

Different tendencies in Keynesian economics

To the left of the “official” Keynesian economists were progressives who hoped the “tools” provided by the new “macroeconomics” would be used by progressive governments to actually improve the position of the working class and other exploited and super-exploited sections of the population. These economists have become known as “post-Keynesian” economists.

These progressives noted that the old pre-Keynesian “orthodox” marginalist economists held that government should take no responsibility for unemployment, poverty, poor educational levels, lack of medical care and other social problems.

In contrast, Keynesian economics implied an active role for the government in combating these social problems. Left progressives who hoped for a gradual evolution toward socialism believed or at least hoped that the “Keynesian revolution” by acknowledging the responsibility of government in dealing with unemployment and other social problems represented a significant step forward in the general direction of socialism.

To the right of mainstream “neo-Keynesian” economists was a reactionary minority who clung to the old-time marginalism. These economists, notwithstanding the Depression and other crises in the history of capitalism, claimed that old-time pre-Keynesian marginalist economists were correct when they held that capitalism is a stable economic system that tends very strongly towards “full employment” as long as the government doesn’t interfere and unions are weak or nonexistent.

These reactionaries, in contrast to the followers of both Marx and Keynes, have blamed the Depression of the 1930s and other lesser crises in the history of capitalism not on the inherent instability of capitalism but rather on government intervention in the economy.

According to these economists, now known as “neoliberals,” government intervention along with the trade unions are the real cause of economic crises, unemployment and related social problems. Centered largely in the economics department of the University of Chicago, these economists include the Austrian School economists and the somewhat more pragmatic and flexible followers of Milton Friedman.

Oddly enough, these reactionaries agree with left Keynesian progressives in their belief that Keynesian economic policies will eventually lead to socialism, which they term “socialist serfdom.”

Monetary Keynesianism

Keynesian “stabilization policy” depends on two main tools—monetary policy and fiscal policy. Monetary policy is defined as the policies followed by the central bank or monetary authority that issues the legal tender currency. The central banks use their power to issue legal tender currency to manipulate two variables: (1) the money supply, which in addition to legal tender token money created directly by the monetary authority includes the credit money—checkbook money—created by the commercial banking system; and (2) the level of interest rates.

If the central bank wants to lower interest rates, it increases the quantity of monetary tokens—legal tender currency—it creates, and if it wants to raise interest rates, it reduces the quantity of its monetary tokens or at least the rate of growth of the monetary tokens it issues.

Keynesian economists and for the most part the central bankers themselves favor a policy of targeting interest rates. As a general rule, the central bank moves to reduce interest rates during recessions and higher than average unemployment and increase interest rates during periods of economic boom, inflation, and lower than average unemployment. Keynesian economists advocate flexible interest rates aimed at maintaining “near to full employment”—as defined by the Keynesian economists—with “low inflation.”

The followers of the late neoliberal Chicago University professor of economics Milton Friedman advocate monetary policies aimed at stabilizing the rate of growth of the broader monetary supply, which the Friedmanites hold will prevent both recessions and inflation.

Fiscal Keynesianism

The second tool that macroeconomics gives capitalist governments is known as fiscal policy. Fiscal policy refers to the taxing, borrowing and spending policy of the central government itself. Keynesian economists believe that the central government should deliberately run deficits financed by borrowed money during periods of higher than average unemployment. During periods of boom and lower than average unemployment, Keynesian economists advocate that the government runs budgetary surpluses to reduce “excess demand” and thus fight inflation.

Left-of-center progressive Keynesian economists advocate relying on fiscal policy, not monetary policy, as the main stabilization tool. The progressives do this because fiscal policy can be used not only for “stabilization purposes” but also to directly deal with social problems such as poverty and chronic unemployment, low levels of education and skill among the impoverished, lack of medical care available to the poor, homelessness and other social problems.

Conservative pro-business “neo-Keynesians” put far more emphases on monetary policy. While fiscal policy can support government action that implements social policies in the interest of the working class and its allies among oppressed sections of the population, monetary policy has no such potential.

The conservative neo-Keynesian economists claim that a correct monetary policy that encourages “economic growth with low inflation”—read high profits—will solve social problems automatically through capitalist economic growth itself. This view shades off to the neoliberal views of the followers of Milton Friedman, who see little or no role for fiscal policy in “stabilization policies” or in dealing with social problems.

Monetary Keynesianism and the industrial cycle

Let’s examine the actual effects of Keynesian policies on the industrial cycle. Can a capitalist government using some combination of fiscal and monetary polices really stabilize the capitalist economy and ensure “near to full employment with low inflation,” leaving aside for the moment exactly how we define “full employment”?

First, I will examine “monetary Keynesianism”—the use of monetary policy to manipulate interest rates to achieve “near to full employment with low inflation.” As I explained last month, Keynes’s “General Theory”—the bible of Keynesian economics—implies that at least in theory it should be possible to ensure “full employment” with “low inflation” using monetary policy alone. Though for reasons that I examined in last month’s reply, Keynes himself didn’t believe that monetary policy would be sufficient in practice.

In last month’s reply, we saw that according to Keynes—and the traditional marginalists—the capitalist economy moves toward an equilibrium where the long-term rate of interest equals the rate of profit. Or what comes to exactly the same thing in Marxist terms, the capitalist economy moves toward an equilibrium where the profit of enterprise is zero.

Pre-Keynesian marginalists and post-Keynesian “neoliberals” claim that the rate of interest and the rate of profit will equalize only at full employment. Keynes of the “General Theory” believed that the rate of interest could well equal the rate of profit at a point where there was considerable unemployment, both of machines and workers. This is what Keynes believed was happening during the post-World War I years, especially during the Depression years that started in 1929 and continued down to the outbreak of World War II.

Marx versus Keynes on capitalism’s need for a positive profit of enterprise

John Bellamy Foster implied in the October 2010 issue of Monthly Review that there was no real difference between the analysis of Marx and that of Keynes on the question of equilibrium, where the economy is held to be in equilibrium when the average rate of profit equals the rate of interest whether or not there is “full employment.” But if Foster believes this, he is mistaken. Marx did not believe that capitalism tends toward an equilibrium where the rate of interest equals the rate of profit. If the rate of interest equaled the rate of profit—with or without “full employment”—the capitalist economy would not be in equilibrium. Why not?

As I have explained in my main posts and other replies, when the rate of interest equals the rate of profit, the profit of enterprise is zero. Under these conditions, the incentive to produce surplus value is destroyed.

Why would capitalists take the additional risk of carrying out an industrial or commercial enterprise if they expect to realize a rate and mass of profit that is no more than they could get by simply purchasing risk-free government bonds—leaving aside for now the risk of currency depreciation?

Since capitalism is an economic system aimed at maximizing the production of surplus value, there is no way a situation that destroys the very incentive to produce surplus value can represent a capitalist equilibrium.

Indeed, in the absence of an incentive to produce surplus value, there is no incentive to carry out any production at all. Industrial and commercial capitalists, including those collective industrial and commercial capitalists known as “giant corporations,” hold out for a rate of return in excess of the rate of interest on long-term government bonds—that is, a positive profit of enterprise.

For example, if the rate of interest on long-term government bonds is 5 percent, competent (1) industrial or commercial capitalists would never consider undertaking an industrial investment unless they had good reason to expect to earn a rate of profit in excess of 5 percent. If our industrial (or commercial) capitalists cannot find investment opportunities that to the best of their judgment will yield a rate of return that exceeds 5 percent, they will prefer to buy government bonds or loan out their money in some other way on the money market.

They will do this until either the rate of interest falls below the rate of profit or the rate of profit rises above the rate of interest. This is most obviously true if our industrial or commercial capitalists borrow capital, since in this case they will have to yield the interest part of the profit to actual owners of the borrowed capital. Therefore, if the rate of interest is equal to the rate of profit, they will realize a zero rate of return on any borrowed capital. But even if they work entirely with their own capital, no industrial or commercial capitalists will carry out an investment if they expect a rate of return that is no higher than the long-term rate of interest.

Average rate of profit

In addition, the industrial (and commercial) capitalists will generally only consider new investments that in their judgment will yield at least the average rate of profit. Or what comes to the same thing, investments in those industries that are expected to yield higher than average profits. Therefore, Marx’s average rate of profit is what is called in the business world the “hurdle rate”—the rate of expected profit below which no new investment will be undertaken. The industrial and commercial capitalists always strive not to realize average rates of profit but super-profits above and beyond the average rate of profit.

Financialization vindicates Marx not Keynes

Therefore, if long-term interest rates do equal the average rate of profit, a portion of the industrial and commercial capitalists will transform themselves into money capitalists. This process continues until the rate of interest drops below the average rate of profit, restoring a positive profit of enterprise. Remember, the profit of enterprise is defined as the difference between the (average) rate of profit and the long-term interest rate.

Therefore, what Keynes and the pre-Keynesian marginalists considered an “equilibrium” is no equilibrium at all. The whole experience of “financialization” that grew out of the historically high interest rates that followed the inflation and the “Volcker Shock” of the 1970s and early 1980s should settle the question as to who was right on this point—Marx on one side or the marginalists including Keynes on the other.

As interest rates soared as a result of the 1970s stagflation crisis, corporations that had been historically mostly industrial (or commercial) firms increasingly turned themselves into financial corporations—collective money capitalists—since it was more profitable for them to invest in interest-bearing loans. They therefore increasingly abandoned their traditional lines of business.

Marginalists explain away surplus value

The error of the marginalists flowed not from their stupidity but from their attempt to explain away surplus value—profit. When the marginalists claim that “in equilibrium” there is no “profit”—meaning profit of enterprise, or in marginalist terminology “economic profit”—but only interest, they have already explained away the lion’s share of the surplus value. That only leaves interest and rent, simplifying the marginalists’ apologetic work.

Interest was then explained as simply resulting from the “scarcity of capital”—just like rent was explained as arising from scarce land—and not labor performed free of charge for the capitalists and other exploiters by the working class. When we deal with surplus value, the most important category in all of economics, or its fractional parts—profit of enterprise, interest, rent, and incomes that are derivative of these primary incomes, like the wages or salaries of unproductive workers—we must keep the difference between the marginalists—including Keynes—and Marx crystal clear. When we deal with surplus value, we are  dealing with nothing less than the exploitation of the working class by the capitalist class.

Marx versus Keynes on value, price and money

Both Keynes and Marx realized in contrast to the pre-Keynesian marginalists that the rate of interest equalizes the supply and demand not of “scarce” capital nor of “savings and investment” but rather the supply of and demand for money. Where Keynes and Marx differed was on what exactly is money.

To Marx, money was the universal equivalent form of the commodity relationship of production, which must of necessity be mediated by a special commodity that measures in its own use value the value of all other commodities. Marx’s analysis of money therefore required that money itself be a commodity, a product of human labor that has a definite use value measured in the unit appropriate for that use value—for example, precious metals measured in terms of weight.

Money material is therefore created by industrial workers who labor in gold mines, not by central or commercial bankers who perform their duties in well-appointed air-conditioned offices. This is true notwithstanding the fact that money can be replaced in circulation by monetary tokens made of base metals or paper and ink and by credit money.

Therefore, the quantity of money in the broad sense of paper money and credit money in terms of its real purchasing power is ultimately limited by the actual quantity of money material. It is therefore the total quantity of money material, and not as bourgeois economists believe the total quantity of commodities that can be produced by capitalist industry at “full employment,” that limits the total quantity of currency in terms of real purchasing power that the monetary authorities can create.

Interest rates equalize supply and demand of money material

Therefore, the clear implication of Marx’s theory is that interest rates will tend toward the point where  the supply of and demand for money material—gold bullion—are equal. In Volume III of “Capital,” Marx provided concrete statistics on prices and interest rates that show, in contradiction to the predictions of the quantity theory of money, that prices were very insensitive to the fluctuations of the Bank of England’s gold reserves but that interest rates were extremely sensitive to fluctuations in the gold reserve. The obvious conclusion is that the global supply of and demand for monetary gold will determine the average rate of interest on the world market.

Keynes like virtually all “modern” bourgeois economists believed that gold could be replaced by a “managed currency” backed not by gold or another precious metal that functions as the money commodity but by commodities as a whole. If this could be done—but according to Marx’s perfected theory of labor value it cannot be—the “monetary authority” would be able to lower interest rates to the level that would ensure “full employment.”  Even if this were possible—which it is not—it would, Keynes notwithstanding, actually be necessary to lower the rate of interest to a level below the rate of profit to ensure a positive profit of enterprise.

A real-life economic experiment and its results

In economics, we cannot generally conduct experiments to test rival theories like is often possible in the natural sciences. But during the 1970s, the U.S. Federal Reserve System and its satellite central banks in effect conducted a grand experiment that pitted Marx’s theory of value against the marginalist theory of value—including its Keynesian form. At the end of the 1960s and the beginning of the 1970s, the U.S. Treasury faced a series of runs on its gold reserves that threatened the then-prevailing gold-dollar exchange world monetary system, known as the Bretton Woods System, with collapse.

The only way to save the Bretton Woods System would have been for the Federal Reserve to raise U.S. interest rates to the point that would reduce the demand for gold bullion sufficiently to end the run on the U.S. Treasury’s gold reserves. The rise in interest rates would have to be carried out regardless of the consequences for “full employment” and economic growth. At the heart of the crisis of the international monetary system of the late 1960s and early 1970s was the hopeless contradiction between Keynesian macroeconomic stabilization policies on one side and the demands of the gold-centered Bretton Woods System on the other.

The policymakers of the U.S. government, backed up by almost all professional economists, were determined to apply Keynesian stabilization policies as opposed to raising interests rates sufficiently to save the Bretton Woods System. (2) If they had chosen instead to dump Keynesian stabilization policies and save the Bretton Woods System, the result would almost certainly have been a worldwide depression that if not necessarily equal to the Depression of the 1930s would still have been considerably worse than any of the relatively mild recessions that had followed World War II.

The conservative mainstream Keynesian economists represented by such economists as the strongly pro-capitalist “neo-Keynesian” Paul Samuelson strongly rejected such a course. They feared the political consequences of a worldwide capitalist depression that would have occurred when the example of the Soviet Union’s  planned economy and those of its allies still existed. Also such a depression would have taken place in the wake of the social unrest and antiwar movements of the 1960s. Therefore, the (bourgeois) economists and the politicians had good reasons to have a greater fear of economic depression than they had had in the past.

Death of the Bretton Woods System

The Keynesian economists saw in what proved to be the mortal crisis of the Bretton Woods international monetary system a tremendous opportunity to put into effect Keynes’s dream of a worldwide system of “managed currency” that would finally eliminate the monetary role of gold. They believed that by eliminating the role of gold, the monetary authorities would finally be free to follow policies aimed at maintaining “near to full employment with low inflation” without worrying about maintaining the convertibility of the currency into gold. The policymakers of the right-wing Republican Nixon administration therefore agreed with the Keynesian economists that Keynesian stabilization policies had to be continued and therefore the Bretton Woods System was simply not worth saving. (3)

With the end of the last vestiges of the international gold standard, the Keynesian economists claimed—and the followers of Milton Friedman agreed with the Keynesians on this point—that the U.S. dollar and its satellite currencies would represent not a special money commodity such as gold but rather would draw their value from commodities as a whole. With the U.S. dollar established as a world “managed currency” in place of gold, the dollar would be issued in just the right quantities to keep interest rates low enough to ensure “near to full employment with low inflation.” Why didn’t it work?

Different laws govern token—paper—money and metallic money

Marx explained that the gold value of paper currency—token money—is determined by its quantity. All things remaining equal, a doubling in the quantity of paper money will lead to a doubling of nominal prices. In this sense and this sense only, Marx supported the “quantity theory of money.”

The basic mistake of the supporters of the quantity theory of money is that they apply the laws that apply to paper money to metallic money. The Keynesians make the opposite mistake. They apply the laws that apply to metallic money to paper money.

An increase in the quantity of metallic money relative to commodities, all other things remaining equal, lowers interest rates and sooner or later leads to an expansion of the market. The Keynesian economists believed that they could achieve the same results by expanding the quantity of the paper money created by the monetary authorities—the central banks—once the role of gold in the international monetary system was eliminated.

Therefore, by getting rid of what was left of the international gold standard, many Keynesian economists believed that even relatively mild recessions of the post-World War II period would be eliminated in the future. They foresaw the final victory of Keynesian economics over the “business cycle.”

In contrast to the rosy predictions of the Keynesian economists, Marx’s theory of value predicts that any attempt to hold down interest rates by increasing the quantity of token or paper money, and indirectly the credit money created on the basis of the increased supply of monetary tokens, would fail.

Instead, we would expect to see currency depreciation against gold leading to a rise in prices measured in terms of depreciated paper money. The rise in prices in terms of currency would soon cancel out the growth in the “real” supply of money—the purchasing power of the total money supply. Over time, we would expect to see no lowering of interest rates, and the expansion of the market would continue to be dependent on the growth in the quantity of real money material—gold bullion—just as was the case under the international gold standard.

Nay, we would expect to see a rise in interest rates that would actually mean a slower growth of the market than would occur under a gold standard, assuming that the growth in the quantity of monetary gold is given. (4)

Any central bank attempt to drive down interest rates by increasing the quantity of the token—paper—money it creates naturally leads to expectations among the money capitalists of a continuing devaluation of the currency. When the money capitalists expect devaluation of the currency, they protect themselves by refusing to loan money unless the rate of interest rises to a level that reflects the perceived devaluation risk. If the prevailing market rates of interest do not sufficiently reflect this “devaluation risk,” the money capitalists will instead hoard gold bullion—actual money material—until interest rates rise to a level that satisfies the money capitalists.

Therefore, when the monetary authority that issues the main world currency—the U.S. Federal Reserve System—pursues a policy of continued devaluation of the currency it issues, it is only a matter of time before the demand for gold bullion is driven to a frenzy, which then requires an extraordinary rise in the rate of interest before the supply of and demand for money material can again be equalized. If the monetary authority continues to resist the necessary rise in interest rates, the result will be the destruction of its token currency altogether.

At the end 1970s and the beginning of the 1980s, the demand for gold bullion was indeed whipped into a frenzy. In order to prevent the destruction of the U.S. dollar, the Federal Reserve finally stopped resisting the rise in interest rates. The “Volcker Shock” had arrived. Therefore, contrary to the views of the progressive Keynesian economists, the Volcker Shock was no mistake but absolutely necessary to prevent a far worse economic collapse of the world capitalist economy.

The devaluation of the world currency—against real money (gold)—and the resulting inflation was simply the market’s way of forcibly raising the rate of interest when the “monetary authority” attempted to lower interest rates by “running the printing press”—issuing paper money that was not backed by a comparable rise in the quantity of gold bullion—real money.

Though the “Volcker Shock” was absolutely necessary for the capitalist economy in the wake of the “monetary Keynesianism” of the 1970s, the problems for the world capitalist economy did not end with the interest rate explosion that finally stabilized the U.S. dollar. Remember, the rate of interest cannot in the long run rise above or even equal the rate of profit. If capitalism is to continue to exist, there must be a positive profit of enterprise.

As interest rates in terms of commodities—real interest rates—as well as interest rates in terms of money material—gold—exploded, they wiped out the profit of enterprise destroying the incentive to produce surplus value. And without the production of surplus value, there can be no capitalist production at all.

How did the capitalists react to this situation? They reacted just as Marx said they would in what in his time was merely a hypothetical situation. A portion of the industrial and commercial capitalists—including those we call giant corporations—converted themselves into money capitalists leading to an inflation of credit that led to a prolonged fall in the rate of interest. This inflation of credit—above all, consumer credit backed by mortgages on residential real estate—was even given a name—”financialization.” The fall in the rate of interest that occurred during “financialization” restored a positive profit of enterprise, which was absolutely necessary if capitalist production was to continue at all.

This, however, left one final step before capitalism could fully recover from the experiment in “monetary Keynesianism” carried out in the 1970s. (5) The excessive debt created by the post-Volcker Shock financialization had to be liquidated by a massive debt deflation. Unfortunately, such debt deflations are accompanied by particularly nasty and stubborn depressions with the resulting prolonged mass unemployment that we are now experiencing.

How monetary Keynesian policy interferes with process that brings about the economic recovery phase of the cycle

Keynesians complain about the “liquidity trap” that accompanies the stagnation-depression phase of the industrial cycle. The deeper the depression the greater the “liquidity trap.” Therefore, the greatest liquidity trap in capitalist history occurred during the 1930s Depression. During the liquidity trap, there are great reserves of cash hoarded in the commercial banking system. It is characteristic of a liquidity trap that both the rate of profit and the rate of interest are low.

What the followers of Keynes don’t realize is that under the capitalist system of production the liquidity trap is a necessary phase of the industrial cycle. The combination of both very low profits—or in many cases even negative profits—and very low interest rates at the bottom of the industrial cycle encourages the capitalists to hoard money in the commercial banking system as opposed to either investing the money productively (M—C..P..C’—M’) or loaning it out at interest (M—M’).

But it is exactly the accumulation of these idle monetary hoards centralized in the banks that constitute the material foundation for the “sudden expansion of the market” that ends the depression and ushers in the next period of prosperity.

How ‘liquidity trap’ is overcome in the course of economic recovery

As the liquidation of the overproduced commodities, including the overproduction of the means of production, in the form of destruction of “unprofitable factories and machines” proceeds, the rate of profit recovers as prices stop falling and the turnover of (variable) capital rises sharply. Marx explained in Volume III of “Capital” that it is this divergence between a high rate of profit and a still low rate of interest that triggers the recovery. Capitalists—both individual capitalists and capitalist corporations—are encouraged to act as industrial and commercial capitalists (M—C—M’) as opposed to money capitalists (M—M’). This encourages the “spirit of enterprise” that marks a “healthy” capitalist recovery.

But this is not what happened during the recovery of the 1980s and 1990s that followed the Volcker Shock. At the start of the recovery—in 1983—interest rates were still near historic highs. Therefore, instead of a rise in capital investment (M—C..P..C’—M’), a lot of money capital was instead diverted into the circuit M—M’. Demand recovered not due so much to a rise in capital investment leading to a rise in employment in general and industrial employment in particular but due to a vastly increased availability of consumer credit, particularly mortgage credit, in the imperialist countries.

Therefore, instead of the usual sudden expansion of the market caused by a dehoarding of previously hoarded currency—and a subsequent increase in the velocity of money—we had a huge rise in the quantity of mostly consumer credit, especially mortgage credit. Or what comes to exactly the same thing, we had “financialization.”

Interest rates finally returned to something like historically normal levels at the turn of the 21st century, stimulating a manic expansion of consumer debt—especially mortgage credit. Credit was stretched to the limit during the 2003-2007 upturn and finally burst in the 2007-09 “Great Recession.”

What if the capitalist governments had saved the Bretton Woods System?

Suppose as a “thought experiment” that the U.S. government and other governments and central banks had made the opposite decision at the end of the 1960s and the beginning of the 1970s and decided to defend the Bretton Woods System, even if this meant abandoning at least for awhile “Keynesian stabilization polices”?

If this had happened, there would have been a major drop in prices—in terms of both dollars and gold, which by definition under a gold standard would have been the same thing. The result would have been a very nasty global crisis of overproduction with resulting mass unemployment throughout the capitalist world. But the crisis would also have led to a major drop in interest rates, in contrast to the huge rise in interest rates that actually occurred.

Remember, in the real world, there was an unprecedented rise in interest rates, first nominal but then “real,” accompanied by the deep recessions of 1974-75 and 1979-82 as well as the lesser recession of 1969-70. This series of back-to-back recessions created a considerable unemployment crisis. If the U.S. government instead had chosen to defend the Bretton Woods System, the resulting depression would have also created an unemployment crisis. But this depression would have run its course during the 1970s as the overproduction of commodities was liquidated. As the conditions that make the realization of value and surplus value possible were restored combined with the rise in the rate of surplus value caused by mass unemployment, profit rates would have soared as interest rates remained low.

Then for the rest of the century, the development of the capitalist economy would have been far “healthier” than it was—far more capital investment, far less inflation of credit and, we can assume, lower unemployment. Financialization would have been avoided. And when the inflation of credit did occur near the end of the hypothetical new “prosperity”—as surely it would have—it would have been to a far greater extent the inflation of corporate credit as opposed to consumer—mortgage—credit. This would not, of course, have prevented our hypothetical healthy capitalist “boom” from ending in a new bust.

We now know that the monetary Keynesianism that was applied in the real world failed to provide anything like “near to full employment with low inflation.” What we do not yet know is how exactly the debt crisis created by monetary Keynesianism will finally be fully resolved. The current attempt by the U.S. Federal Reserve System to deal with the debt problems created by earlier monetary Keynesianism through “quantitative easing,”—that is, by a renewed dose of “monetary Keynesianism,” seems to have little chance of ending other than very badly if Marxist theory—not to speak of real-world experience—is any guide.

The fact that the representatives of the capitalist ruling class can come up with nothing better than to repeat the failed experiment with monetary Keynesianism is a sure sign that it has come into hopeless conflict with the needs of the further development of humankind’s productive forces. Therefore, by applying Marx’s theory of historical materialism we can see that the capitalist class is in the process of dissolution.

Gold standard cannot prevent crises

The failure of monetary Keynesianism does not mean that a new gold standard can deliver a crisis-free capitalism as some right-wing anti-Keynes bourgeois economists claim for all the reasons that I explained in my main posts.

On the contrary, under the international gold standard there were many capitalist crises of generalized overproduction, some quite severe, even leaving aside the special case of the 1929-33 super-crisis. What must be kept in mind is that the only way to eliminate periodic capitalist crises without destroying modern civilization is to transform capitalism into socialism.

No monetary reform, whether a revived international gold standard, Milton Friedman’s stable growth of the money supply, or as we have seen, monetary Keynesianism, can solve the problem of capitalism’s periodic crises of overproduction, with the economic stagnation, mass unemployment and further growth of monopoly these crises bring in their wake.

Clearly, as real-world experience has shown, monetary Keynesianism has failed to deliver on its promises. But what about fiscal Keynesianism? Can it solve the problem of periodic crises of overproduction? We’ll examine this question in the second part of this monthly reply, which will be posted next week.

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1 Incompetent industrial and commercial capitalists are eliminated through competition through a process akin to natural selection. So in the long run, we can assume that all surviving industrial and commercial capitalists are competent.

2 During the first 20 years after World War II, Keynesian stabilization policies and the needs of the gold-centered Bretton Woods System had not yet come into conflict, though it was inevitable that it was only a matter of time before they did. The international monetary crisis of the late 1960s and early 1970s meant that the  collision between Bretton Woods and the Keynesian stabilization policy had arrived.

3 Nixon himself had lost the U.S. presidential election of 1960 to John F. Kennedy in part because the Federal Reserve System had been forced to raise interest rates to meet a gold drain. The rise in interest rates triggered a recessionary double dip in the U.S. economy during the 1960 election year. In addition, by apparently giving the Federal Reserve unlimited freedom to create dollars, the dumping of Bretton Woods seemed to the Nixon administration policymakers to greatly simplify the problems of financing the Vietnam War.

4 In the 40 years that have passed since the abandonment of the gold-centered Bretton Woods System, contrary to the predictions of Keynesian economists, economic growth has been persistently lower than under the Bretton Woods System, with far greater financial instability and deeper recessions.

5 Remember, this experiment was the attempt to eliminate the role of gold altogether in the international monetary system and issue paper currency that was not backed up by monetary gold.