by Michael Roberts
Steve Keen has a new book out. It’s called: Can We Avoid Another Financial Crisis? Steve Keen is professor of economics at Kingston University in the UK. His earlier book (Debunking economics)
is a brilliant expose of the fallacious assumptions and conclusions of
mainstream economics, i.e. ‘perfect competition; general equilibrium and
‘rational expectations’ of economic ‘agents’.
The failure of mainstream economics to see the coming of the global
financial crash and the ensuing Great Recession is now well documented –
see my own coverage here.
This failure has led several mainstream economists to disavow its
usefulness. One such recently was Paul Romer, a former New York
university professor and now the chief economist of the World Bank.
Last fall, before taking up his appointment at the World Bank, Romer wrote a paper accusing
his fellow macroeconomists of forming a monolithic intellectual
community, which deferred to authority, disregarded the opinions of
those outside of their group and ignored unwelcome facts. They behaved
more like cult members than genuine scientists. Romer compared modern
macroeconomics to string theory, famously described as “not even wrong.”
This did not go down well. And now there has been a rebellion among
his 600 economists (yes, 600!) at the World Bank. They have insisted
that he no longer be in charge of managing them, after he demanded that
they drop their long-winded economic jargon and adopted a simpler style
of prose. Romer responded ironically to this demotion of his power at
the World Bank, “Apparently the word is out that when I asked people to write more clearly, I wasn’t nice. And that I slaughter kittens in my office.”
But I digress. The point of this Romer story is to show that those
who dispute the assumptions and conclusions of mainstream economic
apologia are not likely to get much of a hearing. As I said in my post
on Romer’s critique, that he won’t succeed in getting “mainstream economics yanked back into reality”. And so it has proved.
Steve Keen, however, continues his attempt to provide an alternative
closer to economic reality. And his new book also makes a prediction:
that another crash is coming and even picks out some likely candidates
where it is likely to kick off. Now readers of this blog know that I
think it is the job of economics, if it really sees itself as a science,
to not only present theories and test them empirically, but also to
make predictions. That is part of the scientific method. So Keen’s
approach sounds promising.
But all depends, of course, on whether your theory is right. Keen
reiterates his main thesis from his previous work: 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. Crises of excessive credit will appear
and we can predict when by adding the level of credit to national
income. In the major capitalist economies leading up to the crisis of
2007, private sector credit reached record levels, over 300% of GDP in
the US. That credit bubble was bound to burst and thus caused the Great
Recession. And this will happen again. “A capitalist economy can
no better avoid another financial crisis than a dog can avoid picking up
fleas – it’s only a matter of time.”
So what of the next crisis? With his eye on credit growth, Keen sees
China as a terminal case. China has expanded credit at an annualized
rate of around 25 per cent for years on end. Private-sector debt there
exceeds 200% of GDP, making China resemble the over-indebted economies
of Ireland and Spain prior to 2008, but obviously far more significant
to the global economy. “This bubble has to burst,” writes Keen.
Nor does he have much hope for his native Australia, whose credit and
housing bubbles failed to burst in 2008, thanks in part to government
measures to support the housing market, lower interest rates and massive
mining investment to meet China’s insatiable demand for raw materials.
Last year, Australian private-sector credit also nudged above 200% of
GDP, up more than 20 percentage points since the global financial
crisis. Australia shows, says Keen, that “you can avoid a debt crisis today only by putting it off till later.”
This idea that it is the level of credit and the pace of its rise
that is the main criterion for gauging the likelihood of a slump in
capitalist production also lies behind the view of another heterodox
economist, Michael Hudson in his book Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.
Hudson’s main contention that the FIRE economy – finance, insurance,
and real estate – cripples the “real” economy and is slowly
reducing most of us to debt bondage.
Hudson goes further. For him, the old system of industrial
capitalism – hiring labor, investing in plants and equipment and
creating real wealth backed by tangible goods and services – has been
eclipsed by the re-emerging dominance of a parasitic neo-feudal class.
It is this elite, not industrial capitalists, who are the foundation
of most of our economic woes. The 2008 crisis was not a typical boom
and bust housing crash of capitalism but the logical conclusion of
financial parasites slowly bleeding most of us dry. “Today’s
neoliberalism turns the [free market’s] original meaning on its head.
Neoliberals have redefined ‘free markets’ to mean an economy
free for rent-seekers, that is, ‘free’ of government regulation or
taxation of unearned rentier income (rents and financial returns).”
I read this to mean that it is not capitalism of the past,
competition and the accumulation of capital for investment, that is the
problem and cause of crises, but the ‘neoliberal’ world of ‘rentier’
capital, ‘feudal’ parasites and ‘financialisation’. This would suggest
that crises could be solved if capitalism returned to its previous role,
as Adam Smith envisaged it, as expanding production through division of
labour and competition.
Also, for Hudson, the problem of capitalism is not one of
profitability and the striving to extract surplus-value out of the
productive labour force but one the extraction of ‘rents’ out of
industry by landowners and financiers. “Labor (‘consumers’) and
industry are obliged to pay a rising proportion of their income in the
form of rent and interest to the Financial and Property sector for
access to property rights, savings and credit. This leaves insufficient
wages and profits to sustain market demand for consumer goods and
investment in the new means of production (capital goods). The main
causes of economic austerity and polarization are rent deflation
(payments to landlords and monopolists) and debt deflation (payments to
banks, bondholders and other creditors).” (Hudson)
Thus we have a model of capitalism where crises result from
‘imperfections’ in the capitalist model, either due to a lack of
competition and the growth of financial rentiers (Hudson) or due to
excessive credit (Keen). Moreover, crises are the result of a chronic
lack of demand caused by squeezing down wages and raising the level of
debt for households. The latter thesis is not new – as many mainstream economists have argued similarly and it dominates as the cause of crises on the left. As Mian and Sufi put it, “Recessions
are not inevitable – they are not mysterious acts of nature that we
must accept. Instead recessions are a product of a financial system that
fosters too much household debt”.
The key omission in this view of crises is any role for profit and
profitability – which is after all the core of Marx’s analysis of
capitalism – a mode of production for profit not need. Profit is
missing from Keen’s analysis. Indeed, Keen considers Marx’s theory of
value to be wrong or illogical, accepting
the standard neo-Ricardian interpretation and Marx’s law of the
tendency of the rate of profit to fall as being irrelevant to a theory
of crises. Hudson has nothing to say about Marx’s key insights.
The post-Keynesians rely on the Keynes-Kalecki equation,
namely that profits = investment, but it is investment that drives or
creates profits, not vice versa, as Marx would have it. This view
recently reached its extreme in another relatively new book, Capitalism as Oligarchy, by Jim O’Reilly, where, similar to the view of leading post-Keynesian, Engelbert Stockhammer, that is rising inequality that is decisive to crises rather than profitability of capital, O’Reilly argues that “inequality isn’t a side-effect of something we happen to call ‘capitalism’ but is rather the core of what the system is”.
According to O’Reilly, profits does not come from the unpaid labour
of the working class but are ‘created’ for capitalists by the sale of
goods and services to the consumer. Profits come from exploiting the
consumer, not the worker. “where does profit come from? It can’t be from workers since they can spend no more than the wage received (!! – MR). Wages
are a source of revenue through sales, but they’re also a cost. For the
system as a whole, they must net to zero—workers are simply not
profitable.” Only capitalists have more income than they spend, so they create their own profits (hmm… MR).
Apparently, Rosa Luxemburg was on the case… “Her insight that
profit had to come from a source beyond the worker was correct but she
erred in accepting the conventional monetary wisdom that capitalism’s
“aim and goal in life is profit in the form of money and accumulation of
capital.” In this theory, profits are not the driver of capitalism but the result of investment and consumption.
The argument that credit plays a key role in capitalism; and
‘excessive credit’ does so in crises was first explained by Marx. As
Marx wrote in Volume 3 of Capital, “in a system of production where
the entire interconnection of reproduction process rests on credit, a
crisis must inevitably break out if credit is suddenly withdrawn and
only cash payment is accepted…at first glance, therefore the entire
crisis presents itself as simply a credit and monetary crisis”. (p621) But that’s at “first glance”. Behind the financial crisis lies the law of profitability: “the real crisis can only be deduced from the real movement of capitalist production” (TSV2, p512).
Looking for a cause is scientific. But dialectically there can be
causes at different levels, the ultimate (essence) and the proximate
(appearance). The ultimate is found from the real events and then
provides an explanation for the proximate. The crisis of 2008-9, like
other crises, had an underlying cause based on the contradictions
between accumulation of capital and the tendency of the rate of profit
to fall under capitalism. That contradiction arose because the
capitalist mode of production is production for value not for use.
Profit is the aim, not production or consumption. Value is created only
by the exertion of labour (by brain and brawn). Profit comes from the
unpaid value created by labour and appropriated by private owners of the
means of production.
The underlying contradiction between the accumulation of capital and
falling rate of profit (and then a falling mass of profit) is resolved
by crisis, which takes the form of collapse in value, both real value
and fictitious. Indeed, wherever the fictitious expansion of capital has
developed most is where the crisis begins e.g. tulips, stock markets,
housing debt, corporate debt, banking debt, public debt etc. The
financial sector is often where the crisis starts; but a problem in the
production sector is the cause.
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 crises? 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.
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. Thinking
of credit only, as Keen does, leads him to conclude that China is the
most likely trigger of the next global crisis. But that has already been refuted by the experience of the last year.
We must start with profit, which leads to money, investment and capital accumulation and then to employment and incomes. And there is a mass of empirical evidence that profitability and profits lead investment, not vice versa.
Moreover, why did debt and financial rents become ‘excessive’ in the
so-called neoliberal period? The Marxist explanation is that the
profitability of productive capital declined in most modern economies
between the mid-1960s and the early 1980s, and so there was a rise of
investment in finance, property and insurance (FIRE), along with other
neo-liberal counter measures like anti-trade union legislation, labour
laws, privatisation and globalisation. The aim was to raise
profitability of capital, which succeeded to a limited extent up to late
But as profitability began to fall back, the credit boom was
accelerated in the early 2000s, leading eventually to the global
financial crash, credit crunch and the Great Recession. As
profitability in most top capitalist economies has not returned to the
levels of the early 2000s, investment in productive sectors and
productivity growth remains depressed. The boom in credit and stock
markets has returned instead. Fictitious capital has expanded again –
as Keen shows. And rentier capital dominates – as Hudson shows.
If excessive credit alone is to blame for capitalist crises and not
any flaws in the profit mode of production, then the answer is the
control of credit. If rentier capital is to blame for the poverty of
labour and crises, then the answer is to control finance. Indeed, Keen
argues that the best policy prescription is to keep private sector
credit at about 50% of GDP in capitalist economies. Then financial
crises could be avoided. Hudson recommends annulling unpayable debts of
And Hudson recommends a nationalized banking system that provides basic credit.
These are undoubtedly important reforms that a pro-labour government
or administration should implement if it had such power to do so. But
that alone would not stop crises under capitalism, if the majority of
the productive sectors remained privately owned and investing only for
profit not need.
As Hudson says himself: “Just to be clear, ridding
ourselves of financial and rentier parasites will not usher in an
economic utopia. Even under a purely industrial system, economic
problems will abound. Giants such as Apple will continue to offshore profits, companies like Chipotle will keep stealing their workers’ wages, and other big businesses will still gobble up subsidies while fulminating against any kind of government regulation. Class divisions will remain a serious issue.”
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