Friday, August 16, 2013

Capitalist crises: It’s a technical malfunction. Not so, say the Marxists

J.M Keynes
by Michael Roberts

Paul Krugman launched out in his blog recently on yet another justification for the superiority of Keynesian economics (  He put it: “Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. Keynes’s masterwork, The General Theory of Employment, Interest and Money, is noteworthy—and revolutionary—for saying almost nothing about what happens in economic booms. Pre-Keynesian business cycle theorists loved to dwell on the lurid excesses that take place in good times, while having relatively little to say about exactly why these give rise to bad times or what you should do when they do. Keynes reversed this priority; almost all his focus was on how economies stay depressed, and what can be done to make them less depressed.

Two things strike me here.  First, for Krugman (and Keynes) recessions and even depressions are really a “technical malfunction’ in an otherwise perfectly functioning market economy.  The job of economists  is thus simple: “to figure out how to repair that technical problem”.  And second, Krugman praises Keynes’ failure to explain what happens in booms.  For me (and for Alan Freeman in a recent interesting piece, Freeman-Alan-What-causes-Booms) and of course, for Marx, what happens in booms explains why capitalism has slumps and what happens in them.  Without an explanation of the laws of motion of capitalism in booms, we cannot understand the slumps – but apparently not for Keynes or Krugman.

But if Keynesian economics is so superior in its explanation of slumps under capitalism and what to do about them, why don’t governments listen and act accordingly instead of sticking to failing austerity measures?  In another post on his blog, Krugman reckoned that it was the semi-Marxist, ‘post-Keynesian’ of the 1940s, Michal Kalecki who “had the answer. We are in a Keynesian crisis that calls for Keynesian policies; but conservatives find both the diagnosis and the cure anathema, for political reasons. Conceding that the government can and should create jobs would devalue the importance of being nice to businessmen, and suggest that in general the government can do good things. So the obvious diagnosis and response are unacceptable.”  So the reason is that Keynesian economics is not adopted is because it threatens the perceived interests of the capitalist class and their irrational ideological conviction that government is bad and market is good.  Indeed, the capitalists don’t recognise what is in their own interest.

Krugman’s adoption of Kalecki’s explanation for the failure of governments to solve depressions with Keynesian policies really stimulated Duncan Weldon, senior economist at the UK Trade Union Congress.  In his blog (, Weldon proclaimed that “Paul Krugman wrote one of the most significant blog posts on economics I’ve ever read [1].  Weldon referenced Krugman digging up Kalecki’s famous paper arguing this entitled Political Aspects of Full Employment.  Quoting Kalecki, Krugman argued that captains of industry opposed solutions because such policies would undermine their political influence. “Hence budget deficits necessary to carry out government intervention must be regarded as perilous.”  Weldon was very excited: “Essentially Krugman’s (and indeed Kalecki’s) point is this – we have the macroeconomic tools to restart a robust recovery and get unemployment down but these tools are not being used for political reasons.”

Weldon goes on to quote various leading Keynesian economists as they ponder the conundrum that the technical malfunction in the capitalist economy can easily be repaired but no government tries.  Weldon quotes American Keynesian, Brad DeLong: “The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.”  And then he quotes arch- Keynesian Briton, Simon Wren-Lewis who wails that “on the issue of the stupidity of pro-cyclical fiscal policy, it is only the views of politicians on the far-left or far-right that matches those of the majority of macroeconomists.  Given the social, economic and political consequences of declining real wages and rising unemployment, which fiscal austerity only makes worse, this is both a very sad and rather dangerous state of affairs.”  The leading economist of the British trade union movement, Weldon, concludes that “many of supposed macroeconomic problems are not intractable, the problem is as much one of political economy as of economics.”

But is it true that Keynesian policies can solve capitalist slumps and the only reason such policies are not adopted is because of ‘political reasons’?  This is seems a thin reason.  Capitalist strategists are not stupid.  If they thought such policies would work to restore capitalist production, they would adopt them.  The real reason they don’t is that the policies don’t work – at least not to restore the profitability of capitalist production, even if such policies can reduce unemployment for a while.
I took up this issue in an article for the Socialist Review ( and in a subsequent post ( But let me just go over a few of the points against this argument that Keynes had the economics answers to slumps and Kalecki had a ‘political’ explanation of why they were not adopted.  As I argued in many previous posts (,, there is a fundamental ‘malfunction’ in Keynesian-Kalecki theory.  It relies on categories of national income and spending and not on the category of profit to explain the motions of capitalist production.

For Keynes, Kalecki, Krugman and Weldon, profit and where it comes from is irrelevant.  Marx’s value theory, based on abstract labour and profit as the unpaid labour of the working-class, as Keynes put it (to his student Michael Straight): ”was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523].  Keynes considered that Das Kapital was “an obsolete economic textbook which I know to be not only scientifically erroneous, but without interest or application to the modern world”.  Marx’s ideas were “characterised… by mere logical fallacy” and was a “doctrine so illogical and dull”.  Keynes did not need Marx’s value theory and law of profitability to explain capitalist crises.  They were ‘technical malfunctions’ and were to be found in the financial sector of the economy, the ‘rentier’ part, in the distribution of value or income in an economy and not in any way in the productive sectors of the economy.  There was nothing wrong with the capitalist mode of production as such.  Indeed, capitalism would eventually deliver prosperity for all, more leisure and a better society.  Keynes specifically argued for this capitalist future to his students at Cambridge at the height of the Great Depression in the early 1930s, as he was deeply worried that his students had become ‘infected’ with the dreaded and ridiculous ideas of Marxism (see my post

Keynes says the crisis comes about through a lack of ‘effective demand’, namely an unaccountable fall in investment and consumption and this causes profits and wages to fall.  In contrast, Marx says: let’s start with profits.  If profits fall, then capitalists would stop investing, lay off workers and wages would drop and consumption would fall.  Then there would be a lack of effective demand, but this would not be due to a drop in ‘animal spirits’, or a ‘lack of confidence’ (we often hear that phrase from economists), or even too high interest rates, but because profits are down.  The problem lies in the nature of capitalist production, not in the finance sector.

The Keynesian-Kalecki idea that profits depend on investment demand is back to front. For Marxists, it is the other way round: investment depends on profit – and profit depends on the exploitation of labour power and its appropriation by capital. Thus we have an objective causal analysis based on a specific form of class society, not on some mystical psychoanalysis of individual human behaviour among financial speculators (‘animal spirits’ or ‘confidence fairies’,

Now if investment in an economy depends on profits, and if profits are falling, then investment will fall.  So capitalist investment (ie investment for a profit) will now depend on reducing the siphoning off of profits into capitalist consumption (dividends) and/or on restricting non-capitalist investment (government investment). So capitalism needs more government saving, not spending.  The solution is the opposite of the Keynesian policy conclusion. Government spending will not boost profits, but the opposite – and profits are what matters under capitalism. So government spending is a negative for capitalist investment.

For that matter, contrary to some in the left of the labour movement who demand higher wages to boost demand and thus solve the crisis and invoke Keynes in support of such policy, Keynes himself was not on the side of the workers in a solution to a slump.  Keynes commented on whether boosting wages would solve a slump:  “In general, an increase in employment can only occur to the accompaniment of a decline in the rate of real wages.”  So cutting real wages should be part of the solution to a slump even for Keynes.  Indeed, real wages are falling in many capitalist economies at the moment.

So the austerity policies of most governments are not insane, as Keynesians think.  These policies follow from the need to drive down costs, particularly wage costs, but also taxation and interest costs, and the need to weaken the labour movement so that profits can be raised. It is a perfectly rational policy from the point of view of capital, which is why Keynesian policies were never introduced to any degree in the 1930s.  Capitalism came out of that Great Depression only when profitability rose and that was when the US went into a war economy mode, controlling wages and spending and driving up profits for arms manufacturers and others in the war effort.  Capitalism needed war, not Keynes.

Marx’s analysis of booms and slumps is a much superior explanation than that of Keynes-Kalecki.  Marx’s analysis shows that the capitalist system is not just suffering from a ‘technical malfunction’ in its financial sector but has inherent contradictions in the production sector, namely the barrier to growth caused by capital itself.  What flows from this is that the capitalist system cannot be ‘repaired’ in order to achieve sustained economic growth without booms and slumps – it must be replaced.  That is the ultimate policy action for the left.

I am now off to Madrid to debate just this issue with post-Keynesian radicals at the summer school of Spain’s Anti-Capitalist Initiative.

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