Riccardo Bellofiore, Steve Keen and the delusions of debt

October 7, 2011 by michael roberts

There’s been a bit of a gap since my last post as I have been away.  However, I got back to London in time to take in two interesting meetings.  One was called the European against Austerity conference (http://www.europeagainstausterity.org/) where several well-known left economists and trade unionists spoke on an alternative left strategy on the euro debt crisis than the one being imposed by the Troika of the IMF, the EU commission and the European Central Bank.

Most were agreed that the Greek people should not pay the huge debt payments they owe to the very banks in Europe and the US that caused the crisis in the first place.  Fiscal austerity was not only going to cut the living standards of the Greek people by around 30%; it would not work in restoring economic growth for Greece.  But the attendees were unclear or disagreed on what policies to adopt as an alternative beyond defaulting on the debt.  Some wanted Greece to leave the Eurozone too and some did not want that.  I’ve outlined my view in previous posts (An alternative programme for Europe, 11 September 2011).  So I’m not going to repeat the points now.

Instead I want to take on some interesting points made in a frontispiece article for the conference presented by Italian left economist, Riccardo Bellofiore (The postman always rings twice: the euro crisis inside the global crisis).  Bellofiore argues that the euro crisis is really just part of an overall global debt crisis.  As he puts its: “demand and the low growth in Europe, as well as the current sovereign debt crisis, came wholly from outside… if only the economic analysis of the Left would have escaped obsolete readings, such as the tendential fall in the rate of profit or would have resisted the underconsumption temptation (according to which the global crisis was of a world of low wages), it could have seen in advance that was the collapse of ‘privatised Keynesianism’. 

So, according to Bellofiore, capitalism got into crisis because of privatised Keynesianism, not because of falling profitability or underconsumption.  By privatised Keynesianism, Bellofiore means uncontrolled private debt expansion that creates an ‘imbalance’ in the capitalist economy which must eventually be corrected through a crisis.  Thus the cause of capitalist crisis is not the Marxist one of profitability or rising inequality (currently the vogue among non-mainstream heterodox economists), but uncontrolled debt.

This is more or less the theory of Herman Minsky, student of Joseph Schumpeter and follower of John Maynard Keynes.  Bellofiore makes the point that in a monetary economy there can be no growth without credit or debt.  Debt or credit is a ‘good thing’ if it is applied to productive investments and it is bad if it is used just to speculate in financial instruments or to invest in unproductive activities like property.  Bellofiore’s conclusion is that we need to replace ‘privatised Keynesianism’ with the ‘socialised investment’.   As Keynes put in The General Theory of Employment, Interest and Money: ‘It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.’ (p378)   ‘Only experience… can show how far management of the rate of interest is capable of continuously stimulating the appropriate volume of investment… I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest… I expect to see the State… taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital… will be too great to be offset by any practicable changes in the rate of interest.’ (p164)  – in other words, profitability is more important for capitalists than cheap money in deciding on investing. Therefore Keynes concluded “ that the duty of ordering the current volume of investment cannot safely be left in private hands.’ (p320).

What Keynes meant about ‘ordering’ investment is ambiguous. Keynes seemed to see ‘socialised investment’ as a supplement to the private sector.  Minsky seemed to go further because, for him, under capitalism, credit or debt becomes uncontrollable and takes on a Ponzi-like form that eventually leads to a credit crunch and crisis.  This was the real cause of capitalist crises, not the Marxist explanation.  Profitability is not the problem but the lack of demand created by a mountain of credit (what Marx called fictitious capital) – see my critique of Minsky in my paper (The causes of the Great Recession) – see p 17.  So, for Minsky, government investment must replace private investment to sustain demand.

This brings me to the second meeting.  This was entitled  The deluded discipline of economics and organised by Prime Economics (www.primeeconomics.org), which is a left Keynesian policy research group based in London.  The main speaker was Steve Keen, the Australian economist who was promoting the second edition of his book, Debunking Economics – (http://www.amazon.co.uk/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926/ref=sr_1_1?ie=UTF8&qid=1317987820&sr=8-1).  This is a brilliant destruction of the unrealistic and contradictory assumptions and conclusions of modern mainstream economics, particularly neoclassical theory.  Don’t miss it.  Steve Keen was also the winner of the Real Economics Review prize for predicting the global financial crisis of 2008-9, which he won over the competition of greater media luminaries like Nouriel Roubini (see my paper op cit).

Keen argued that mainstream economics could not have predicted the crisis because it is wedded to a fetish that economics is really a process of supply meeting demand at the intersection of two curves to achieve equilibrium.  Dynamic, unstable processes in the real world are ignored or denied.  Neoclassical economics is a neat and plausible theory, but wrong.  It makes some psychological assumptions about individual needs and tastes and ignores income inequality, different savings patterns and social classes.  It assumes that an individual demand curve can just be aggregated to the macro level of the whole economy.  Indeed, for the neoclassical model, there is only one demand curve, not even an aggregation of lots of individual ones.  But the world of the individual cannot be just multiplied to the aggregate – this is a fallacy of composition.  There is not a straight path from the micro to the macro.  This was the mistake of all those previous theorists like Say or Walras that assumed that because an individual seller must have a buyer, so total supply in an economy must be matched by total demand.  This was fallacy first debunked by Marx and later by Keynes (who never read Marx).

Keen made fun with the various statements of mainstream economists prior to the crisis.  And he quoted Nobel prize winning neoclassical economist Robert Solow who attacked the fetishism of the mainstream.  I have another quote from Solow, when the octogenarian gave evidence to the US Congress on the state of mainstream economics in July 2010:  “The macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles seems to have absolutely nothing to say about the problem.  One single combination worker-owner-consumer-everything else simplified economy has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the conclusion that there is nothing for macroeconomic policy to do”. That’s why mainstream economics got things so wrong and remains in denial.

Uncertainty, change and, above all, the intervention of money and credit disprove the neoclassical assumptions.  And that is where Keen makes his key point that, in a modern capitalist economy credit is necessary to ensure investment and growth.  But once credit is in the economic process, there is nothing to stop it mismatching demand and supply.  Indeed, to really measure the level of demand, credit must be added to income.  And Keen discovered that in the major capitalist economies leading up to the crisis of 2007, private sector credit outstripped the growth of national income.  It reached record levels, over 300% of GDP in the US.   That credit bubble was bound to burst and thus caused the Great Recession.

Undoubtedly the rise of excessive credit in the major capitalist economies was a feature of the period before the crisis.  And its very size meant that the crunch would be correspondingly more severe as capitalist sector saw the value of this fictitious capital destroyed.  But is it really right to say that excessive credit is the cause of capitalist crisis?  Marx argued that credit gets out of hand because capitalists find that profitability is falling and they look to boost the mass of profits by extending credit.  Uncontrollable credit is a product of falling profitability.  In my book, The Great Recession, I provide evidence for this point and in my paper (op cit, p30).

But there appears to be no role for profit and profitability in Keen’s crisis model.  Indeed, in his book, he starts his model with capital (or money if you prefer), which leads to investment, then income and, within income, to profits and wages.  As I have argued in a previous post, this back to front (see Double dips, deficits and debt, 24 August 2011).  I think it is a delusion or a fetish to look at credit as the main or only cause of crisis.  In a capitalist economy, profit rules.  If you deny that, you are denying that capitalism is the right term to describe the modern economy.   Maybe it would be better to talk about a credit economy, and credit providers or creators and not capitalists. We must start with profit,which leads to money, investment and capital accumulation and then to employment and incomes.  The Keynesian/Keen model assumes that capital (or credit) is already in place with or without profits.  The issue for Keen is that you can have too much of a ‘good thing’.

This leads to some interesting policy conclusions.  If excessive credit is to blame for capitalist crises and not any flaws in the profit mode of production, then the answer is the control of credit.  Indeed, in the meeting Keen argued that the best policy prescription was to keep private sector credit at about 50% of GDP in capitalist economies (it is way over 100% in most).   Then financial crises could be avoided.  Even if that were true, how could it be done without public ownership and control of the banking sector?  No doubt, Keen would support that measure.

Ann Pettifor from Prime Economics also spoke at the meeting and promoted the idea that we need more credit expansion to get the economy out of the depression it is in.  For her, credit creates activity and income (in contrast to Marx who reckoned that activity by labour created income).   And yet we had just heard from Keen that too much credit causes crises!  This becomes almost semantic: debt is bad, but credit is good.  Of course, Pettifor was arguing that banks need to provide credit for productive purposes to households and small businesses and not speculate in stocks and bonds.  But that means converting the banks into public service entities.  Doing so, poses the question of control over the whole private sector and its ability to make profits.   It can’t stop at controlling credit: ‘socialised investment’ in credit would not be enough.