Keynes on the ‘trade cycle’
Keynes throughout the “General Theory” was concerned with explaining how his marginalist concept of “equilibrium”—marginal efficiency of capital = rate of interest—could correspond to mass unemployment. The industrial cycle itself was of secondary concern for Keynes. But in chapter 22, entitled “Notes on the Trade Cycle,” he does deal with the industrial cycle, or as he called it in the English manner, the “trade cycle” or “industrial trade cycle.”
When he did deal with the industrial cycle, marginalism hindered Keynes at every step. Unlike the classical economists and Marx, the marginalists do not distinguish between use value and exchange value. As a marginalist, even if an unorthodox one, Keynes therefore had problems in explaining how commodities could be overproduced yet be “scarce” at the same time.
Keynes, like other marginalists, tended to treat capitalism as though it was system of production for human needs. Or, as Marx often complained about the bourgeois economists he criticized, Keynes tended to treat capitalist production as though it was socialist production.
With these assumptions, Keynes concluded that the size of the market is determined by the size of the total population. As a great admirer of Malthus, Keynes saw big dangers in both the growth and the lack of growth of the total population. (1)
One danger Keynes saw was the danger of absolute overpopulation, with all the accompanying Malthusian horrors. Unlike Malthus, however, Keynes was fairly optimistic that population growth could be restrained. Already in his time, the growth rate of the population was declining in the imperialist countries.
However, since Keynes in the marginalist manner saw capitalism as a system of production for human need, he assumed that the size of the market was governed by the size of the population. Therefore, if the growth in population was restrained and eventually ceased—as Keynes was convinced it would sooner or later have to—wouldn’t this imply a halt in the never-ending expansion of markets—abstracting cyclical fluctuations—that marks the capitalist system?
And wouldn’t the cessation of the expansion of the market mean chronic overproduction and growing chronic mass unemployment? Indeed, it is the tendency of population growth to slow down or even halt in the imperialist countries altogether that Keynes believed was the fundamental cause of the Great Depression.
Keynes did not, as I have demonstrated over the last few weeks, believe that surplus value is produced at all but arises in the sphere of circulation due to the scarcity of use values. Therefore, Keynes could not even conceive of the the contradiction between the conditions that favor the production of surplus value and those that favor the realization of surplus value. (2)
Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital, to use Keynes’s preferred terminology—as the main factor that determines the changes in the phases of industrial cycle:
“Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.” (This and all the following quotes from Keynes in this post are from chapter 22 of the “General Theory.”)
Changes in the rate and mass of profit can occur either due to changes in the amount of surplus value produced both absolutely and relative to the existing capital, or due to changes in the amount of surplus value that can be realized in money form. The main problem for Marxist crisis theory is to what extent the collapse in the rate of profit that occurs at the beginning of the crisis is caused by the growing difficulties of producing surplus value versus the increasing difficulties of realizing surplus value.
Keynes, however, as a marginalist cannot even pose the question in these terms, let alone answer it. “We have seen above,” Keynes wrote, “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.” This is the best that Keynes can do, limited as he is by marginalism.
Keynes in the manner so typical of vulgar economics adopts the view of how things appear to the industrial or commercial capitalist engaged in the daily struggle of competition. For now, business is good, and demand is outstripping the supply of commodities that our industrial capitalist is producing at current prices. The rate of profit on new investment is very high. Since the human mind tends to assume that the current trend will continue, our industrial capitalist is very optimistic about the future and keeps on increasing his plans to increase the productive capacity of his business.
But suddenly business goes sour, and the yield on his existing industrial assets collapses. (3) Far from being optimistic about the prospects for profit on his new investments, our fellow now falls into complete despair about the prospects for his business and about the business outlook.
Keynes saw the violent psychological swings in mood among the “entrepreneurs” as the basic source of the extreme instability that is characteristic of a highly developed capitalist economy. Keynes believed that the expenditures on articles of personal consumption and the expenditures of the government are reasonably stable, but that the rate of investment, determined by the expectations and moods of the industrial capitalists, is extremely unstable.
“In conditions of laissez-faire,” Keynes wrote, “the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology [emphasis added—SW] of investment markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.”
Is Keynes advocating that society take over the means of production so that the level of investment can be stabilized, eliminating the violent swings of the capitalist industrial cycle? By no means.
That would mean an end to the “current order of society.” Keynes certainly did not mean by this that a planned socialist economy must replace capitalism. But Keynes’s opposition to the “classical” marginalists and other schools of economic liberalism did see the need for large-scale intervention on the part of the capitalist state in the operations of the economy. He admits that highly developed capitalism left to its own devices is a dangerously unstable system. In this respect, he is in agreement with Marx and profound disagreement with Milton Friedman, who stubbornly insisted that capitalism was a naturally stable system.
Paul Sweezy praised Keynes for his profound understanding of the psychology of the business world. Sweezy, I assume, was contrasting Keynes to the professors of economics at Harvard who in the early 1930s taught marginalist economics just as the capitalist world was plunging into the Great Depression. Undoubtedly, Keynes was superior to them.
While I am no expert on psychology, I assume the active industrial and commercial capitalists experience mood swings as the market, and consequently their profits, fluctuate. Keynes, however, implies that capitalism could operate in a far more stable way if only the “psychology” of the the capitalists could change.
Could the key to ending the industrial cycle of boom and bust therefore lie in the psychological profession? Here Keynes’s view is subjective and in the philosophical sense idealist. The real world is not reflected in the human mind, but rather the human mind somehow creates material reality. Indeed, the entire marginalist theory of value is subjective, while Ricardo’s and Marx’s concept of labor value is objective.
Therefore, isn’t it true that in reality the changes in the minds of the active industrial and commercial capitalists are simply reflections in the minds of the capitalists of the objective contradictions of capitalist production—especially the contradiction between socialized production and private appropriation? (4)
Liquidity trap
According to Keynes, the industrial capitalists will expand their enterprises as long as they believe that the rate of profit—marginal efficiency of capital—earned on them will be above the prevailing rate of interest. But once the crisis or recession replaces the boom, the marginal efficiency of capital falls to below that level—indeed profits often turn into outright losses. “Later on, a decline in the rate of interest will be a great aid to recovery and, probably, a necessary condition of it. But, for the moment, the collapse in the marginal efficiency of capital may be so complete that no practicable reduction in the rate of interest will be enough. If a reduction in the rate of interest was capable of proving an effective remedy by itself, it might be possible to achieve a recovery without the elapse of any considerable interval of time and by means more or less directly under the control of the monetary authority.”
This was indeed the the view of Milton Friedman and his “monetarist” school.” “But, Keynes wrote, “in fact, this is not usually the case; and it is not so easy to revive the marginal efficiency of capital, determined, as it is, by the uncontrollable and disobedient psychology of the business world. (5) It is the return of confidence, to speak in ordinary language, which is so insusceptible to control in an economy of individualistic capitalism. This is the aspect of the slump which bankers and business men have been right in emphasizing, and which the economists who have put their faith in a ‘purely monetary’ remedy have underestimated.”
In depression, the “marginal efficiency of capital”—remember, Keynes defines the marginal efficiency of capital as the rate of profit that the industrial and commercial capitalists expect to receive on new investments—falls so low or is even negative—that it becomes impossible for the “monetary authority” to lower interest rates to the point where they are below the “marginal efficiency of capital.”
Once the high investment of the boom collapses, it will usually be between three to five years, Keynes suggested, before investment can begin to recover. In order to check massive involuntary unemployment, the government, Keynes believed, should step in with massive deficit spending and thus compensate for the contraction of demand bought on by the collapse of investment by the industrial capitalists.
In a situation where the rate of profit is low or even negative, no possible lowering of the rate of interest can, by itself, revive the economy. A situation where the rate of profit is so low that no reduction can revive the economy is called by Keynesian economists a “liquidity trap.” The rate of profit—or marginal efficiency of capital, as Keynes would put it—must rise substantially before there can be a meaningful economic recovery.
A permanent liquidity trap?
A low rate of interest is a necessary but completely insufficient condition for recovery. Marx agreed with Keynes on this point. Marx pointed out that an upturn in the industrial cycle requires both a low rate of interest and a rapidly rising rate of profit.
In the years that immediately followed the publication of the “General Theory” in 1936, for reasons that I will examine in the coming series of posts that will deal with the so-called long cycles or long waves, the Depression dragged on, though the already very low rate of interest fell further.
Many of the more radical followers of Keynes began to suggest that this time the “liquidity trap” was not a passing if unpleasantly prolonged phase of the industrial cycle, but permanent. Only government spending on an ever higher level could prevent the Depression from lasting indefinitely. This is known as the theory of “secular stagnation.”
But, Keynes asked, wouldn’t it be better to act before a crisis leads to depression with its associated “liquidity trap”? “The remedy for the boom,” he wrote, “is not a higher rate of interest but a lower rate of interest!” Keynes was saying that if the monetary authority instead of raising interest rates during the boom—taking away the punch bowel, as William McChesney Martin, a former head of the U.S. Federal Reserve System, once famously put it—the central bank actually lowered interest rates, especially long-term interest rates, the crisis might be avoided altogether. Then no liquidity trap would develop in the first place.
While practical Keynesian economists are often seen as representing a series of policies that aim at moderating a recession once it begins, Keynes here is more ambitious. He is suggesting that recessions can be abolished altogether—itself a worthy aim—without abolishing the capitalist system.
Assume we have a boom. The “scarcity” of capital goods is declining, and it’s only a matter of time before the “marginal efficiency of capital”—the rate of profit that industrial and commercial capitalists expect on new investments—will fall.
Traditionally, the central banks raise interest rates during the boom. The reason given is that the central banks must restrain the boom in order to limit the inevitable recession that will follow. If recessions are caused by a general overproduction of commodities, this makes a certain amount of sense within the brutal logic of the capitalist system. Since the overproduction occurs during the boom, if you limit the overproduction of the boom by raising interest rates, the recession, which represents the forcible termination and liquidation of the boom-time overproduction will be less severe.
But what happens if the “monetary authority” expands the money supply, or more strictly, expands the supply of token money and therefore reduces the rate of interest during the boom? (6) Wouldn’t this whip overproduction into a frenzy leading to an even worse crash? The long practical experience of central banking has generally taught the central bankers—men like William McChesney Martin, for example—that this is so.
But Keynes challenged the traditional central banker view. Keynes reasoned like this: As the production of capital goods rises during the boom, the reduced scarcity of capital goods reduces the marginal efficiency of capital. Therefore, Keynes asks, wouldn’t it be possible for the monetary authority to lower the rate of interest in such a way that the rate of interest remains below the new lower marginal efficiency of capital? In that case, Keynes believed, the recession and its consequent liquidity trap would be avoided.
The fatal flaw in Keynesian economics
Keynes realized correctly that, contrary to the claims of the traditional marginalists, the rate of interest does not equalize the demand and supply of capital—or, what comes to more or less the same thing in marginalist economics, savings and investments—but rather the total quantity of money with the demand for money.
So far so good. The problem for Keynes’s idea is that rate of interest tends to equalize the supply and demand for metallic money. For reasons, I explained in my posts dealing with money, real money must itself always be a commodity. Therefore, the rate of interest tends towards the point where the supply and demand of real money material—monetary gold—are equal.
If under the capitalist system we could replace commodity money with “non-commodity” money whose quantity could be controlled by a monetary authority, the monetary authority would then be in a position to lower the rate of interest whenever it is necessary to do so to avoid a crisis. Unfortunately for Keynes’s dream of a crisis-free capitalism—for reasons I have already examined in the posts that deal with money, this is not possible under the capitalist system.
If the rate of growth of the global supply of monetary gold rises relative to the rate of growth of the global quantity of commodities, the rate of interest will, all other things remaining equal, fall globally. If, however, the rate of growth of monetary gold falls behind the increase in the quantity of commodities, the rate of interest will tend to rise. In the case where the rate of monetary growth, or what comes to exactly the same thing, the level of gold production, is insufficient to prevent the rise in the rate of interest, no increase in the rate of growth of the token money created by the “monetary authority” can prevent—at least not for very long—the rate of interest from rising.
Remember, one of the primary functions of crises is to lower the prices of commodities in terms of gold, thereby increasing the rate of profit in the gold mining and refining industries. This stimulates the production of gold thus lowering the rate of interest. It is through this cyclical mechanism that the rate of interest is kept below the rate of profit in the long run.
If prosperity became permanent, that is if we abolished crises, prices in terms of gold would rise, even if only gradually, without limit. Sooner or later, prices would lose all connection with the actual labor value of commodities. Gold production—or whatever commodity represents money material—would grind to a halt. The rate of interest would then rise without limit.
But this it cannot do in the real world, because as soon as the rate of interest swallows up the entire profit causing the profit of enterprise to fall to zero, the very incentive to produce surplus value is destroyed and a crisis can longer be staved off. The crisis would once again lower the rate of interest below the rate of profit. This would enable capitalist production to continue but precisely at the price of a crisis.
Through the crisis, not only is the rate of interest kept below the rate of profit in the long run, but commodity prices are kept in line with labor values. In effect, Keynes was trying to find a way to abolish the law of value while retaining the capitalist system. This is impossible.
Keynes, however, did not understand why his proposals were utopian, nor too the professional bourgeois economists today, whether they belong to the Keynesian or for that matter Friedmanite schools, which claim that crises can be abolished within the framework of the capitalist system. Indeed, by undermining confidence in the token currency, an expansion of token money not matched by a corresponding expansion in metallic money tends to—except perhaps in the very short run—increase rather reduce the rate of interest. This has consequences fatal for Keynesian economics.
Therefore, it is not surprising that in the real world, central bankers, being after all practical people, act completely contrary to Keynes’s advice. We saw this during the last economic cycle, when the U.S. Federal Reserve System steadily reduced the rate of growth of the quantity of token money it was creating in the period leading up to crisis that began in 2007. This has ended in the current huge “liquidity trap” that the U.S. Federal Reserve System and the Obama administration are trying to get out of by running huge deficits much as Keynes advocated under such circumstances, backed up by their doubling of the quantity of dollar token money over only a few months.
Perhaps if Keynes were alive today, he would complain that the policies of the Federal Reserve and the Obama administration are very dangerous and they are taking his ideas well beyond the limits of safety. He would explain that the real mistake was the policy of slowing the growth rate of the “monetary base” and pushing up interest rates before the crash and its subsequent “liquidity trap.” If only the Federal Reserve System had instead accelerated the growth in token money and further lowered the rate of interest, perhaps the terrible crisis the capitalist world is facing today would have been avoided. This, he could explain, is what he actually advocated in the “General Theory.”
But in one period, the boom of the 1960s, when the influence of Keynes was at its flood tide, there was an attempt to follow something like Keynes’s advice. The results show why Keynes’s advice does not work in practice.
In the early 1960s, the Bretton Woods system was still in effect. The cornerstone of the Bretton Woods system was the definition of the U.S. dollar as 1/35th of a troy ounce of gold, or what comes to exactly the same thing, the dollar price of gold was fixed at $35 a troy ounce. The Federal Reserve System and the European central banks formed an agreement to buy and sell gold to keep the price of gold on the open market—not just in terms of dealings among central banks and governments—at $35 an ounce. Under the gold pool, the central banks agreed that if the price of gold began to rise above $35 on the open market, the central banks would sell gold; if it began to fall below $35, they would buy gold.
The crisis of 1968
But in 1968, the gold pool collapsed when the demand for gold at $35 became so strong that it threatened to drain all the remaining gold reserves of the central banks within a matter of weeks. The immediate cause of the gold pool collapse was the decision of U.S. President Lyndon Johnson to sharply increase the number of U.S. troops in the wake of the “Tet Offensive” launched by the Vietnamese resistance in the winter of 1968. (7)
But the Tet Offensive was only the immediate reason for the collapse of the gold pool and the Bretton Woods System, not the fundamental reason. Even if the Tet Offensive had not occurred, the Bretton Woods system was doomed. Why is this true?
It is true because academic and government economists had convinced themselves that they could avoid another prolonged deep depression that would bring into question the continued existence of the capitalist system if only they could prevent the general price level from falling. They could do this in terms of token money by allowing the gold value of the paper money to fall—which was, however, in a fatal conflict with the Bretton Woods system and the gold pool, which required that the gold value be maintained at the existing level.
The operation of the law of labor value, however, does not permit a permanent inflation in prices in terms of gold. Therefore, the only way that they could prevent a sharp decline of prices after the long post-World War II boom-induced rise in prices was through a massive rise in the dollar price of gold. The only way that the gold pool or the Bretton Woods System could survive was through a major fall in dollar prices. But this is exactly what the governments and central banks were determined to avoid.
The followers of Keynes, who in those days dominated both the economic departments of the universities and governmental and central bank policy-making circles, reasoned like this. The boom of the sixties meant that the quantity of capital goods was increasing very rapidly. Didn’t this mean that capital goods were becoming less scarce? Sooner or later there would be a sharp drop in the “marginal efficiency of capital” just like was the case after every previous capitalist economic boom. But wouldn’t that mean yet another major economic depression and a new “liquidity trap” that would threaten the very existence of their beloved capitalist system?
If the rules of the Bretton Woods system had been followed, interest rates would have had to be raised very sharply to reduce the demand for gold. Remember, all things remaining equal the demand for gold falls when interest rates rise and rises when interest rates fall. The run on and collapse of the gold pool in March 1968 showed that the money capitalists wished to hold more gold than they did at the prevailing level of interest rates, indeed more gold than existed in the combined vaults of the central banks, governments and the private markets combined. Only by sharply raising the “reward”—the rate of interest that money capitalists get for not holding gold—would the demand for gold be once again lowered to the supply of gold that was actually available.
But due to the long postwar boom, the rate of interest was already extremely high. If the central banks had raised interest rates sufficiently to bring the demand for gold back into balance with the actual supply of gold, Keynesian policy makers reasoned, the rate of interest would surely rise above the falling, or soon to be falling, marginal efficiency of capital. It would be back to depression, mass unemployment and the liquidity trap.
And this was in a world in which the United States was not only losing the war against Vietnam, but where the Soviet Union was still powerful, China was still in throes of the radical phase of its great revolution, and unions and labor-based political parties in the “Western” world were far more powerful than they are today.
To some extent, the governments and the central banks yielded to the inevitable and did raise interest rates. This reduced the demand for gold to something closer to its actual supply for the moment but also began to slow down the economy. The Keynesian policy makers were determined, however, not to allow the “slowdown” to turn into a major new depression.
To avoid this, the Keynesian policy makers decided to abandon the gold pool and let the price of gold rise on the free market. Interest rates were not raised sufficiently or long enough to stabilize the gold value of the dollar and the currencies linked to it under the Bretton Woods system on the open market for very long. Applying the marginalist theory of value they had learned in their university days, these economists believed that the price of gold probably wouldn’t rise very much. As gold was “demonetized,” it would lose its main use value—its “utility—as money. The market would soon be flooded with gold, since besides its monetary function gold has relatively few other use values. Its price or value—the same thing in marginalist economics—would then plummet.
Therefore, these economists saw the crisis of 1968 as an opportunity to get rid of “commodity money” in the form of gold once and for all and usher in Keynes’s dream of a truly recession-free capitalism. All that would be necessary to achieve this would be for the governments and central banks to stop hoarding and dealing in gold and defining their currencies in terms of gold.
With commodity money finally abolished, the Keynesians imagined, the central banks would then be free to create as much token money as necessary to keep the rate of interest below the rate of profit, or as Keynes would put it, below the marginal efficiency of capital. There would be no recession—or at least no major recession—the industrial and commercial capitalists would not panic, and there would therefore be no “sudden collapse of the marginal efficiency of capital.”
Contrary to the predictions of Keynesian economists, however, the price of gold soared, if I may be permitted to use that slang term for the gold value of the dollar. As each dollar represented less gold—real money—prices in terms of dollars began to rise faster than the central banks expanded the quantity of token money and faster than commercial banks could expand the supply of credit money based on the token money created by the central banks. Whenever the central banks tried to drive down interest rates by expanding the rate of growth of their token money, the price of gold would leap upward generating a new wave of inflation.
The Keynesian economists and government kept on hoping the nightmare of high inflation, high unemployment and economic stagnation, which was dubbed “stagflation,” would simply go away. While there were occasional minor improvements, stagflation continued.
The crisis of 1979
In the fall of 1979, things came to a head. Alan Greenspan, the Republican economist who later became chairman of the Federal Reserve Board, explains in his memoir, “The Age of Turbulence,” that the administration of Democratic President Jimmy Carter appointed Paul Volcker as chairman of the Federal Reserve Board. (8) “He’d been Fed chairman barely two months,” Greenspan writes, “when “a crisis erupted.” What was the nature of the crisis? “The interest rates on ten-year Treasury Notes leaped to nearly 11 percent on October 23. Suddenly investors [money capitalists—SW] began to picture an oil-induced inflationary spiral leading to a breakdowns in trade, a global recession, or even worse.” (9)
A combination of a dramatic and prolonged rise in interest rates to levels never before seen in U.S history, severe recession, and eventually a new rise in world gold production, brought on by the collapse of commodity prices in terms of gold, eventually stabilized the U.S. dollar. This made possible the Great Moderation—but not a “new great boom”—of 1983-2007.
But this did not occur until official unemployment rates had risen into double digits. As a result of the prolonged siege of astronomical interest rates, much of basic U.S. industry—and British industry where the crisis was even more acute—collapsed. The heartland of U.S. basic industry that had dominated world industrial production for most of the 20th century was transformed into the “rust belt” and has never recovered to this day. Keynes would have been horrified if he had lived to see it.
Interest rates were very slow to fall. As extremely high interest rates dragged on for years—the exact opposite of what Keynes would have wanted—the result was financialization, de-industrialization, wave after wave of corporate downsizing and a vast weakening of the position of the trade unions as the balance of forces on the labor market swung in favor of the buyers of the commodity labor power.
Indeed, the level of employment in U.S. manufacturing, at least according to official government figures, has never again returned to the levels that prevailed when the crisis erupted in the fall of 1979. All this made a mockery of Keynesian economics. The “monetary authorities” proved completely powerless to prevent the explosion of the rate of interest and all the disastrous consequences that followed.
The attempt of the central banks to follow Keynes’s advice and hold down interest rates by expanding the supply of their token money backfired big time.
In reality, Keynesian economics works only when the evolution of the industrial cycle already favors an upturn. At best, it can accelerate an upturn that is already on the way. If gold production is strong and the central banks can issue much more token money without it depreciating, interest rates can fall. A combination of a low rate of interest and rising rate of profit leads to an economic boom.
Keynesian economists are glad to take the credit for the happy result, like they did after World War II. But when conditions favor a major downturn in the industrial cycle, the attempts by the “monetary authorities” to hold down interest rates by expanding the rate of growth of their token money leads to rising inflation and soon to skyrocketing interest rates, which inevitably ends in a violent recession.
The Keynesian “tool chest,” then, turns out to be completely powerless to prevent the crisis. All it can do is change the form of the crisis somewhat, from a classic deflationary depression, to a 1970s-style “stagflationary crisis” that combines high inflation, extremely high interest rates, falling real wages for the workers, and mass unemployment.
To really eliminate crises, an entirely different “tool chest” is required, a working-class revolution that ends once and for all the contradiction between socialized production and private appropriation that is the ultimate cause of crises.
Indeed, by raising the average rate of interest relative to the rate of profit over a prolonged period of time, Keynesian economics in practice, by lowering the profit of enterprise, actually reduces economic growth over the long run.
It is no accident that during the 1980s, capitalist governments and economists beat a retreat from Keynesian economics under the banner of Milton Friedman’s “monetarism.” Only the panic of 2008-09 drove them in desperation back into the arms of Keynes. The capitalist governments and their economists hope against hope that the 1970s decade was some kind of bizarre aberration that will not return. (10) This is the best that a doomed class and the governments that defend it can hope for.
Next, I will take a final look at Keynes’s economic and social philosophy and his predictions for the future of capitalism.
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1 Bourgeois ideologues generally blame the mass poverty that is an inseparable part of the capitalist system on the alleged too-rapid growth of the population. Keynes was no exception. Marx emphasized that capitalism is characterized by relative overpopulation—that is, by the presence of a part of the population that is chronically unemployed or is only casually employed. In the 19th century, this necessary-for-capitalism part of the population was called the “surplus population.”
More recently, it has been called the “underclass.” The surplus population, to use the more frank terminology of the 19th century, is an absolutely necessary part of the population. It holds down the wages of the employed workers and provides a recruiting pool on those occasions when there is a sudden increase in the demand for the commodity labor power.
2 As I explained in the my first posts, Marxists are divided between those who see the cause of the crises as being rooted in the difficulties of realizing surplus value and those who see crises as being rooted in the difficulties of producing enough surplus value to keep capitalist expanded reproduction going.
3 In Keynes’s time, almost all active industrial and commercial capitalists, entrepreneurs as Keynes called them, were still men like most but not all are still today.
4 By active industrial and commercial capitalists, I mean the people who actually run the large industrial and commercial corporations, as opposed to the idle stockholders who merely own them.
5 Typically, Keynes saw the problem in the “psychology” of the capitalists rather than seeing the “psychology” of the active capitalists as reflecting the very real objective contradictions of the capitalist system. This is the opposite of philosophical materialism, which holds that our mental perceptions of reality are reflections of actual objective material reality.
6 Keynes hated the gold standard for precisely this reason. Under the gold standard, the central banks do not actually create token money but only credit money. Under a gold standard, banknotes are actually promissory notes payable to the bearer on demand in gold. Therefore, the ability of the central banks to issue more notes is ultimately limited by their need to maintain the convertibility of the notes into gold.
Under a system of inconvertible paper money, however, the currency issued by the central banks is token money. Keynes imagined that under such a “managed currency system,” as it was called in the 1930s, the central banks would be able to actually control the rate of interest, including the long-term rate of interest, by creating whatever amount of token money was necessary, though he feared that central banks would not fully use their power to do so due to the influence of financial interests that favored high interest rates.
7 The Tet offensive was launched in the winter of 1968 by the Vietnamese resistance in “South Vietnam” immediately after the the traditional ceasefire for the Christmas-Tet holidays. It gave the lie to the claims of the Johnson administration that the United States was winning the war against the people of Vietnam. The head of the U.S. military in Vietnam, General William Westmoreland, asked for hundreds of thousands of additional U.S. troops to break the Vietnamese resistance. The Johnson administration decided to grant Westmoreland’s request. However, that decision led to panic on the international gold market, causing demand for the precious metal to soar to such an extent that the entire gold supply of the U.S. government and its Western European satellites would have been exhausted in a matter of weeks.
Fearing an explosion in the already high rate of interest if the U.S. government went ahead with the planned escalation, the decision of the Johnson administration to grant Westmoreland’s request was reversed, the United States was forced to open peace talks with the Vietnamese, and Johnson himself announced that he would not seek reelection. The war continued, but the United States was obliged to gradually withdraw its ground troops concentrating instead on financially cheaper but extremely murderous air and navy bombardment, combined with chemical warfare.
8 Paul Volcker, a Democrat, was appointed by the Democratic U.S. President Jimmy Carter to the chairmanship of the Board of Governors of the U.S. Federal Reserve System in 1979. Faced with the collapsing gold value of the dollar and the consequent skyrocketing inflation, Volcker had little choice but to raise interest rates dramatically. This along with a new rise in gold production finally broke the demand for gold, and inflation subsided, but only at the cost of a prolonged severe recession that raised the official unemployment rate into double digits before finally bottoming out at the end of 1982.
Many Keynesian and political liberals—not neoliberals—often echoed by some Marxists, insisted that Volcker made a mistake in raising interest rates so much. But they have never explained exactly how else the demand for gold could have been broken, and hyperinflation followed by an even worse economic collapse avoided, within the limits of the capitalist system. Today, Volcker is a senior economic advisor to President Barack Obama.
9 Greenspan—a throughly vulgar bourgeois economist—claims that the crisis that erupted in the fall of 1979 was oil-induced and blames it largely on the Iranian revolution of 1979, which overthrew the brutal “pro-Western” monarchy imposed on Iran in the CIA-organized coup of 1953.
But we have seen over the last year how closely the price of oil is tied to the gold value of the dollar. Whenever the dollar weakens against gold, the price of oil promptly rises, usually to an even greater extent in terms of dollars. Since markets even out, the dollar price of oil falls to an even greater extent than the dollar price of gold whenever the dollar price of gold falls. Of course, the price of oil is not fixed in terms of gold any more than is the price of any other commodity. But it is very sensitive to the price of gold in dollars tending to reproduce these swings in exaggerated movements. The last year gives a vivid illustration of this. There is little doubt that similar forces were in operation in 1979.
10 The capitalist media have been making much of recent signs that the violent decline in industrial production and world trade that began with last fall’s panic is beginning to bottom out. They have been claiming that the world capitalist economy is stabilizing. These signs are still highly tentative and subject to reversal, especially in light of the virtual collapse of the U.S. auto industry, which includes the once unthinkable bankruptcy of General Motors.
The U.S. Federal Reserve Board reported that U.S. industrial production continued its decline last month. It is far too soon to announce the bottom of the recession. However, no recession can last forever, even if it seems to the growing ranks of the unemployed that the current one is. The brutal downturn that we have been going through has been exceptionally long as well as severe. But sooner or later it will bottom out. But when it does bottom out, will this mark the beginning of a new period of stability for world capitalism similar to the “Great Moderation” of 1983-2007, or even another “Great Boom”?
There is good reason, however, to suspect that any real relative stability is still far off, even if the recession proper ends fairly soon. For example, the dollar monetary base has doubled since last fall, and U.S, government bonds have declined sharply over a few months, despite the frantic attempts of the U.S. Federal Reserve System to keep long-term interest rates low. What happens if the money capitalists react to the huge increase in the quantity of dollar-denominated token money by demanding a sharp increase in “their reward” for not holding gold, in the form of sharply higher interest rates? Both economic experience and economic theory seem to be pointing in that direction. None of this looks like the beginning of a healthy and sustainable upswing of the worldwide industrial cycle.
What the central banks and governments have been trying to do is force a recovery, though they have been taking increasing fright at what such a forced recovery will lead to. It is likely that the years that will follow the end of the current vicious recession will see sharp swings in inflation rates, interest rates and industrial production. Unemployment rates are likely to be trending upwards, though with occasional dips, much like they did in the 1970s. A return to the relative stability of the “Great Moderation,” though not in theory excluded, certainly doesn’t seem likely any time soon.
A Critique of Crisis Theory 