Monday, 5 September 2011

Capitalist Crisis, Keynesian Delusions

Economic growth in the major capitalist countries has ground to a halt, governments plan expenditure cuts, unemployment is rising and austerity begins. Surely, there is a way out – some way to revive growth? How can it make sense to cut spending when the economy is already in bad shape? Given that capitalism is in its worst crisis since the 1930s, it is understandable that such questions should arise.

This article looks at one of the proposed solutions to the crisis: boosting state investment. I do not claim that this proposal is at the forefront of a vibrant debate. If anything, it is advocated in a way that recognises it is dead in the water. However, the ideas behind such proposals are common among critics of capitalism, so they are worth addressing. My objectives are to show how these notions have little understanding of the cause of the crisis and are deluded about what it will take to ‘solve’ it. First, I will look at the basic ideas, and then I will examine the theory that lies behind such proposals, one that stems from a ‘Keynesian’ analysis of what is wrong with capitalism.

1        Stiglitz & stagnation

Columbia professor, economics Nobel prize winner, critic of and ex-Chief Economist for the World Bank, Joseph Stiglitz, argued in a recent Financial Times article that the world economy was likely to get worse. Nevertheless, there were things he thought the government could do to ameliorate the crisis, even though a “low tax and debt fetishism sweeping the North Atlantic” and “fiscal stringency” would be likely to prevent the correct course of action from being taken.[1]

Stiglitz thought there was little chance of the economy being boosted by monetary policy. Interest rates were already close to zero, and a third round of ‘quantitative easing’ from the US Fed would be even less effective than the previous two in spurring growth.[2] While he argued that governments should try to get banks to lend to “small and medium-sized enterprises”, his key anti-crisis solution was as follows:

“But the real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments. This will both promote growth and generate tax revenues, lowering debt to gross domestic product ratios in the medium term and increasing debt sustainability.”

As a policy pundit, Stiglitz is bound to offer solutions to the crisis, even if his assessment of the political environment makes him doubt that they will be endorsed. But what if his solutions will not work, and it is not just ‘politics’ that prevent them from being enacted?

The serious flaw in Stiglitz’s analysis is revealed when he argues that the state should make “high-return investments.” These cannot be conjured up from nowhere. It is like the old joke about the economist’s method of opening a can: ‘Let’s assume we have a can opener’. A debt-driven, speculative boom started at the turn of the century because such ‘high-return investments’ did not exist.[3]

In a separate book review article published last year, Stiglitz gave some more detail and argued that they do exist.[4] He claimed that there was ‘no shortage of opportunities for investments with high social returns’, such as ‘retrofitting the world economy to face the challenges of global warming, or making the investment necessary to reduce global poverty’.

But these are just more imaginary can openers, this time slipped in using the term ‘high social returns’ to cover up for the fact that they do not bring in high monetary returns - the only kind of returns capitalists are interested in.[5] The capitalist market does not care about ‘social returns’; it wants actual profit. So Stiglitz then has to look for government measures to give the market direction, for example to ‘make carbon emissions sufficiently costly for there to be an incentive to invest in reducing them’. But this just forces the problem one step along.

While various taxes and subsidies will make some investments more profitable and others less, it is far from clear how overall investment can be made more profitable without a general subsidy. Such a general subsidy would have to come from taxation elsewhere, and presumably not on profits, or that would defeat the object of encouraging investment. But taxation on other spending or incomes would also be likely to hit the economy in various ways. So that leaves more government borrowing to fund the subsidy, when government borrowing is already ruinously high.

I will not go into further detail, since the argument would then revolve around whether a certain tax hike here, a particular subsidy there, and directed government spending somewhere else could have the net effect of boosting spending and employment in the economy. This is the kind of thing designed to keep economists busy, but it ignores the scale of the problem. We are faced with a major crisis of capitalist profitability that this tinkering mentality pushes out of view, as it revolves around how to manage the economy better.

Stiglitz may be proposing that the state invests directly, not that it produces incentives for private companies. This would be consistent with Keynesian theory (see below), and would make sense if private capitalist companies were ignoring good prospective investments. It is entirely possible that major corporations do overlook good ideas, and that a range of innovations is waiting to come to market. But global investment has collapsed because profitability is insufficient, and it is not going to be fixed by finding a few attractive niches! Between 2007 and 2010, the volume of gross fixed capital investment in the US fell by 23% and in the 27 countries of the European Union by 13%. Just to bring the investment numbers back up to their real level in 2007 would demand spending a sum of around $400bn in both the US and in the EU!

2        What were Keynes’s ‘insights’?

Stiglitz complains about the policies and excesses of the past and the political biases of the present. As a system mechanic, he makes himself available to suggest what can be done now to save it, and his book review ends with the comment: ‘Keynes’s insights are needed now if we’re to save capitalism once again from the capitalists.’ It is worth looking at what these insights are.

The theory of the capitalist economy developed by J M Keynes in the mid-1930s is attractive for many radically minded people, even if they have never read the founding book.[6] Keynes’s theory is critical of the mechanism of the capitalist market and the supposed tendency for it to be self-correcting. Keynes accepted all the nostrums of standard bourgeois economic theory about the individual consumer or company, but thought that, at the aggregate level of the whole economy, the capitalist market system had weaknesses that the existing theory did not address. High unemployment and a waste of productive resources was the result of such market failures. This makes Keynes’s theory appear relevant today, especially for those who would like to reform the system in ways that might also be acceptable to capitalists.

Keynes’s analysis was developed several years into the Great Depression of the 1930s.[7] His key arguments against conventional theory were that it was too ‘static’, ignoring how expectations of the future would impact spending decisions today, and that it failed to account for how aggregate spending in the economy might persistently remain too low, so that full employment of resources could not be achieved. He agreed with the standard theory that wages were too high, but thought that cutting wages would only makes things worse by reducing the level of aggregate demand (see below for more on this). Problems with the way the capitalist market worked meant that state intervention, especially state investment, was needed in order to save the system from stagnation.

The Keynesian critique of capitalist markets should not be surprising, given the economic collapse of the interwar period. It was also a critique that gave a theoretical, after-the-fact justification for the public spending measures – in the US and elsewhere - that had already been implemented by governments in response to the crisis and high unemployment.[8] To that extent it was irrelevant in practice, and ‘Keynesianism’ only took on the status of an economic ideology in the post-1945 period. After 1945, the experience of massive state economic intervention in the Second World War and what then looked like a successful Soviet economy, was the context for various theories of capitalist ‘planning’ and how to run the ‘mixed economy’.[9]

The aggregate demand and expenditure flows focused on by the Keynesians were once famously represented in a hydraulic model of the economy, built by AW Phillips at the London School of Economics in 1949.[10] Government expenditures and tax rates could be altered to see the effect on consumer spending, investment and the country’s trade balance. This model was an ingenious piece of engineering to illustrate a concept, but it had the same problem as the Keynesian understanding of the economy. Everything worked fine when the power behind the flows was on, but what if the power faded or the flows leaked? The profitability on capital investments was not the driver of this flow mechanism. Nor was it possible to understand from this system why profitability might fall and push the mechanism into crisis.[11]

3        Keynesian policy and capitalist profits

Stiglitz’s approach shares the basic error of all Keynesian analysis: a focus on the flows of spending in the economy, rather than on what drives the capitalist system: profit. This is not to say that profitability is completely ignored, but it is sidelined in the analysis of how the system works. For Stiglitz, this is ironic, since he asks a perceptive question, à propos the build up to the US housing crisis: “Why did it seem that even with record low interest rates, the only investment that could be generated was in housing for poor Americans for which they couldn’t afford to pay? A long tradition in economics, of which Keynes was a part, has focused on the diminution of investment opportunities.”[12] But my argument that he ignores profitability is still valid, since he goes no further in examining these diminishing investment opportunities and instead offers the ‘high social returns’ investment options.[13] In this section, I will show how an understanding of capitalist profitability reveals that a Keynesian-type exit from the crisis is a delusion.

3.1 Multiple problems

Keynesian attempts to save capitalism are often argued using the promise of the ‘multiplier’ effect.[14] The theory uses a technique for modelling the impact of higher (government) spending that claims to show how the final change in incomes and economic activity will be several times the size of the initial spending increase. This can look like a reasonable proposition, and the argument is as follows.

If the government spends an extra $1bn, then, if 90% of the incomes received by people and companies are spent, this will lead to still more spending. After many further rounds, the series of extra expenditures will eventually add up to $10bn, or 10 times the initial amount (based on the ratio of 90% of the new cash received being spent each time).[15] Magic indeed, and, on the face of it, a clear case for encouraging more government spending, given that its result is so dramatic. Equally, it looks like a clear case against government (or any other) spending cuts.

As one might guess, however, things are not that simple. The multiplier theory overlooks who gets the money, what they do with it and why, and assumes that the ‘propensity to consume’ stays stable (as in the 90% of the example). Millions of government cash poured into a particular sector of the economy will be gratefully received by whoever gets it. But people may use the cash to pay down their existing debts, rather than spending it on consumer goods. The companies who do find that they have boosted sales may also think twice before investing or hiring more employees if profitability is low. So the impact of the extra government spending is deflated by the reality of the capitalist economic crisis. It might even make things worse, if the deficits generated caused a financial market panic about rising government debt.

The fact is that despite the huge increases in government spending in recent years, the level of real GDP in each of the six major capitalist economies – the US, Japan, Germany, France, the UK and Italy - is still no higher (mid-2011) than it was at the beginning of 2008. For several (UK, Italy, Japan) it is at least 4% lower.[16] This is largely because there has been a plunge in private sector fixed investment (see Section 1, above), and it shows little sign of reversing. It can be argued that the extra government spending has at least stopped the economy from collapsing. But this situation shows that the ‘multiplier’ is not the lever for lifting the capitalist system out of stagnation.

To understand the impact of extra spending, one must take account of the profit dynamic of the capitalist system, which is absent from the Keynesian approach. This would explain why the ‘multiplier effect’ fails to do any good. When conditions for profitable investment exist, then the extra demand from government spending (or from elsewhere) can probably stimulate higher output, employment and investment to some extent. However, if profitability is insufficient, then the extra spending will have far less effect. If it is financed by borrowing, then it will probably just lead to higher debt levels.

Chart 1: Public sector debt ratios in G7 countries, 1940-2010

Source: A G Haldane, ‘Risk off’, Bank of England, 18 August 2011[17]

A recent study of 18 major capitalist economies has shown that higher debt can encourage economic growth up to a point, but that rising debt ratios can then become a drag on growth.[18] For government debt, the study found the tipping point to be in the range of 80-100% of GDP. I would not necessarily endorse these numbers, but think that the process is consistent with a Marxist understanding of what has been going on in the global economy: weakening profitability has led to more reliance on debt, both from the private sector and from governments (especially as governments took on private sector liabilities), and now the debt itself (see the chart for the G7 ratios) has become a problem to solve.[19]

3.2 Fallacy of composition?

The logic of the Keynesian multiplier (in reverse) is often used by protestors against spending cuts. It is commonly expressed as a ‘fallacy of composition’ critique: what looks like a good idea from the point of view of one element of the economy may be a disaster for the whole economy. The usual example given is where a company or household or government department cuts its spending in order to live within its budget or to save money. ‘If everybody did that, the economy would grind to a halt’ is the conclusion, so, whatever you do, keep spending, that is the only way to keep the economic machine ticking over! This looks like an effective case against governments and companies planning to curb spending - until the circumstances of why this is taking place is considered more fully.

What if the spending has been beyond budget for a long time, and debt levels have already increased dramatically? What if the pot of gold at the end of the rainbow keeps failing to materialise? It does not make sense for someone to throw good money after bad. Does it really make sense for everybody to throw good money after bad? For reasons discussed in the previous section, the dynamic of profitability says that it does not.

A related issue is where politicians of different countries hope that somebody else may increase spending to help offset the drop in demand caused by their cuts. This concern about all countries engaging in austerity together, and the threat of a synchronised recession, has been a feature of many international conferences. External demand could, in principle, limit the damage from domestic cuts. But that possibility overlooks the fact that many countries are faced with the same problems of profitability and debt. This is a global crisis, and the synchronicity has increased.

3.3 Psychology and uncertainty

A pervasive feature of Keynesian economics is the focus on psychology and uncertainty about the future. Here is Keynes’s own summary of the main theses in the General Theory:

“Thus we can sometimes regard our ultimate independent variables as consisting of (1) the three fundamental psychological factors, namely, the psychological propensity to consume, the psychological attitude to liquidity and the psychological expectation of future yield from capital-assets, (2) the wage-unit as determined by the bargains reached between employers and employed, and (3) the quantity of money as determined by the action of the central bank; so that, if we take as given the factors specified above, these variables determine the national income (or dividend) and the quantity of employment.”[20]

Keynes traces the capitalist economic cycle as a consequence of changing expectations of future profits, fears of losses, over-optimism or a pessimism that will not dissipate of its own accord. All of this is beset by the uncertainties endemic to the capitalist market system. He is also concerned about extreme (but only extreme) inequality in society, because the rich have less ‘propensity to consume’ from their massive incomes than do the impecunious workers.

His analysis sees a tendency for aggregate demand to be insufficient to achieve full employment of resources, mainly the result of a lack of consumer demand due to this low propensity to consume. Insufficient aggregate demand depresses expectations for profits, and this underlies his call for state spending to step in and overcome the weakness in private spending. Never mind that the purpose of capitalist production is profit, not full employment or consumption, and set aside the fact that resources are employed only if production is sufficiently profitable. In his analysis, there is no conception of any long-term trend in profitability, just a view that higher investment at any point could lower what he calls the ‘marginal efficiency of capital’ (sic). But he thinks that technical changes, a fall of interest rates or higher profit expectations could raise it again.

For Keynes, the ‘expectation’ of future yield, or profit, from capital assets is also psychological, rather than having much to do with the production process (apart from paying the workers, presumably, as in his point (2)). Keynes downplays the profits gained from current operations and focuses on the future expectations of profit. These can be depressed if things look bad, especially by a fall in aggregate demand in the economy; but they can also be upbeat, if expectations of high returns are encouraged by rising demand.

This mode of thinking does allow for the vagaries of the capitalist market, the fact that returns on investments are spread over a number of years and that the future is not certain. But these observations are banal, though Keynes presents them, as do his later acolytes, as a major step forward in understanding. The General Theory was some kind of advance over the bourgeois competition since it recognised that there was a problem with capitalism. Yet Keynes’s focus was on what he saw as faults in the market’s mechanism that could be fixed, not on the profit dynamic of the system itself. [21] So he was left mulling over the best tactics for patching it up. Today we have one enduring legacy of Keynes’s psychological theories. Every day we find media commentaries on the economy that focus on ‘market sentiment’, ‘expectations’, and ‘confidence’. Everything would be all right if only ‘confidence’ returned!

3.4 How Keynes cuts real wages
One of the best ways to patch up the system in Keynes’s view was to cut real wages. This conclusion of Keynesian theory is usually ignored in commentaries that try to give his economic thought a radical or progressive veneer. In Keynes’s analysis, real wage cuts were necessary in order to cut unemployment and boost production. The way to do it follows from the other independent variables (2) and (3), cited above.

He thought that if the wage bargain (nominal wage) for employees were set, then it was a good idea for the central bank to back a policy to allow or encourage inflation so that the real wage, its buying power, would fall. Keynes argued that it was far better to cut real wages with inflation than for companies or the government to try to cut nominal wages directly. This could cause worker resistance and social tension, something high on Keynes’s anxiety list, given the threat of revolution and turmoil in the 1930s.[22] Only in a ‘highly authoritarian’ society could there be successful ‘sudden, substantial, all-round changes’ to the nominal wages that would work – for example in Italy, Germany or Russia. [23] Outside fascist or Stalinist states, the best way to achieve lower real wages, and get what was needed for capitalist business and the economy, was the inflation route.

Incidentally, this is one feature of Keynesian policy used today. Nominal wages are rising less than inflation in most major capitalist countries. Central banks have largely abandoned any pretence at ‘inflation targeting’ and allow higher inflation because real wages are being pushed lower.

Keynes argued that cuts in nominal wages might still leave the real wage too high, because falling demand as a result of lower wages might also lead to falling prices. In this sense, he did not blame workers for demanding high wages; even if workers agreed to nominal wage cuts, a likely fall in the price level would probably lead to real wages remaining little changed, and too high to encourage employment. He focused on raising aggregate demand in the economy to boost employment. But in his view, a necessary condition for achieving anything like full employment was still to cut the real wage rate.[24] In the case of Stiglitz’s version of Keynesian analysis, he has gone so far as to theorise that unemployment is necessary to reduce ‘shirking’ by workers. Such is the development of Keynesian thought today.[25]

4        Conclusion

The purpose of this article has been to show the vacuous nature of Keynesian solutions to crisis. The profit system cannot be reformed, nor capitalism saved, by enlightened technocrats. Even the technocrats aim to cut workers’ wages, but capitalism demands far more than this measure alone to try and restore profitability. That is why austerity, the destruction of capital, elimination of ‘waste’ and international conflict will be the order of the day, not Keynesian experiments to increase demand in the economy.[26] Anyone fighting against attacks on working class living standards, or other crisis solutions proposed by capitalism, should not rely on the delusions of Keynesian analysis.

Tony Norfield, 5 September 2011

APPENDIX: The rate of profit in Marxist theory [27]

A Marxist understanding of capitalism starts by looking at the system as a whole. It analyses the particular social form that human labour takes, where workers have to sell their labour-power, their ability to work, to the owners of the means of production. In pre-capitalist social systems, the labour that workers perform for their masters over and above that which is necessary for their own upkeep takes a very clear form. This may be giving a tithe to the church, working on certain days of the week in the lord’s fields or being a slave. Under capitalism, by contrast, the nature of surplus-labour is hidden from view. Workers may think they are getting an unfair deal and that wages are too low. But, in principle, it will seem as if there could be a ‘fair wage’, where the work done is properly rewarded by a decent employer.

The reality is that notions of a fair wage are based on customary living standards, which, in turn, are based on what resources are needed to reproduce different kinds of worker for the capitalist. The cost of reproducing the worker is what ultimately determines the value of his or her labour-power. The workers sell this labour-power to the capitalists, but it takes less time than they actually work to produce a value equivalent to the wages they receive. Even a ‘fair wage’ allows room for a surplus-value to be produced by the worker, after they have been paid the full value of this special commodity they have sold to the capitalist, their labour-power.

Any form of economic activity involves using means of production – machinery, technology and raw materials of various kinds that have already been produced – and labour-power – the active, new element of production. The means of production are the ‘dead labour’, the labour-power is the ‘living labour’. In any form of society, the ‘economic question’ is how to use these resources to best advantage. Under capitalism, however, capitalists own the means of production and they decide how to answer the economic question. Their answer is one they cannot help but give: produce as much profit as possible. This imperative is driven by the fact that if they made a loss, they would soon find that they were no longer capitalists. If they made only a small profit, then they would have few resources with which to expand their operations or invest in new technology.

The capitalist’s profit is not determined by his own efforts, but via society as a whole. This is not simply a case of needing to recognise the nature of the capitalist social system, with private property in means of production and where labour-power is bought in the market. It is also important to see that the value of the wages paid to the workers – how long it takes to produce the customary means of subsistence - will also depend on productivity in the whole economy. Likewise for the costs of raw materials, machinery and technology. Each individual capitalist enterprise, however inspired or stupid, should therefore be considered as simply a fraction, bigger or smaller, of the total system.

Taking the system as a whole, what under feudalism would be a mass of surplus-labour performed by vassals working for the lords, under capitalism is a mass of surplus-value produced by workers for the capitalists. Products of their labour are sold at prices higher than the costs of production the capitalists pay for: they embody an amount of unpaid surplus-labour. This is the origin of capitalist profit, which is the form that surplus-labour takes under capitalism. Variations in the prices of individual commodities sold will alter the amount of profit that each capitalist receives. But this has no effect on the total profit distributed among the capitalists.

The rate of profit is the measure of this total profit divided by the total amount of capital advanced. This rate of profit is the average for the system as a whole, not for any particular capitalist company. An individual company will have a rate above or below the average, but movements of capital between different branches of production will be guided by differences in the rate of profit – assuming that monopoly barriers are absent. Capitalism is driven by profit and for any given amount of capital invested, the best return is clearly where the rate of profit is highest.

As more capital moves into a favoured business sector, its premium prices will fall back and profitability will slip towards the average. If a sector of business has low profitability, over time capital will leave and prices and costs will adjust to raise profits again. Since there will be a tendency for capitalists to earn an average rate of profit on a given investment, no matter how that investment is divided up into purchases of means of production and labour-power, this averaging process is one other factor that conceals the origin of the profit in the surplus-labour of the workers. For every $1 million invested, if the amount of profit is similar where one capitalist employs 10 workers and another employs a 100, it appears as if the profit derives from the capital advanced, not from the amount of surplus-labour performed.

This is how capitalism allocates social labour under the guiding light of profit. But this is not simply a system for distributing labour across the economy. For Marxism, the capitalist economy has a dynamic that both develops productivity and ends up driving society to destruction.

Competition forces capitalists to raise productivity in order to cut costs. But raising productivity means that more things are made per worker in a given time, so this will increase the mass of means of production – raw materials, machinery and use of technology - compared to the number of workers employed and the labour-time they perform. Alongside this rise in what Marx called the ‘technical composition’ of capital, the value of the means of production will also tend to increase relative to the amount of the wage bill. The concept of the rising ‘organic composition’ of capital is used to refer to the process of capital accumulation where both the technical and the value compositions rise together.

This combined ‘organic’ concept of the composition of capital is critical for understanding what happens to capitalist profitability. While the number of hours of surplus-labour determines the amount of the profit, the rate of profit is measured by this amount divided by the value of the total capital invested. Take the example of a typical worker. There is a limit to the amount of surplus-labour that can be performed which is set by the total working day. Yet there is no definite limit to the mass of raw materials and machinery that he or she can work with. So, over time, there is a tendency for the rate of profit to fall per worker, and in general across the capitalist economy. This is because the mass of profit will tend not to rise as much as the value of the capital invested in means of production. As the rate of profit falls, the system becomes more prone to crises. Marx’s theory therefore shows how capitalism places limits on increasing productivity and is a barrier to social progress.[28]

The logic of a crisis is to increase the rate of profit back to levels that will enable capital accumulation to resume. Two classic mechanisms are the destruction of capital values and the increased exploitation of the workforce. Capital values can be destroyed through a collapse in asset and commodity prices. Those capitalists left standing can then buy means of production cheaply. Any new profit extracted is then measured over a smaller capital outlay, raising the rate of profit. A similar effect can be achieved by the political seizure of productive assets in other countries. This can risk conflict between rival powers and war. The other key mechanism for restoring profitability, increased exploitation of the workforce, involves falling real wages and/or onerous productivity deals imposed by employers.

A third important mechanism is the elimination of ‘waste’. By this I mean expenditures that capital can do without - those which do not directly contribute to profitability, either now or in the near future. Why bother educating workers when there are plenty of skilled and educated ones available already? Why bother to provide more than the absolute minimum of health and welfare services? In the public sector that is at the forefront of government spending curbs, a resetting of wages and conditions is under way, as well as cuts in jobs. In the formerly protected professions – both inside and outside state employment – the logic of capital will now aggressively ask: what’s the point of your job?

[1] See ‘How to make the best of the long malaise’, Financial Times, 9 August 2011.
[2] I would agree with this assessment. QE2 finished at end-June 2011, but US central bank chairman Bernanke has so far avoided a direct promise of a 3rd round of buying junk assets, trying to improve his tactics in dealing with financial market expectations. The idea is probably that if a future gift  - more QE - appears possible, then it may have a higher value for ‘confidence’ than a (final) gift that is actually given, and then seen to be ineffective.
[3] See my article ‘Anti-Bank Populism in the Imperial Heartland’, 5 July 2011, on this blog for details of the trend in the US rate of profit and the rise of speculation.
[4] For the following examples cited here, see his review of a book by Keynes scholar Robert Skidelsky, ‘The Non-Existent Hand’, in London Review of Books, Vol. 32 No 8, 22 April 2010.
[5] At a recent conference in Edinburgh, Scotland, I was informed by an expert on alternative energy that there was no way that wind-driven technology (even in windy Scotland) would ever compete in the market with the usual energy sources without major state subsidies. I am not arguing that ‘alternative energy’ sources should not be used, but am pointing out the capitalist barriers to their use.
[6] See J M Keynes, The General Theory of Employment, Interest and Money, (First edition 1936) Macmillan Press 1977. The General Theory is available, believe it or not, on
[7] The impact of the inter-war depression was very uneven. There was a dramatic fall in world trade after 1929, and a slump in industrial output in every country - except the USSR, which was boosted by Stalin’s 5-Year Plans. Out of 16 countries covered in a League of Nations table of industrial production, by 1934 UK output had basically regained the 1929 level (helped by Empire protectionism), having earlier dropped by 16%, but US output was still one-third lower by 1934. Japan, Sweden and Chile were the only countries by 1934 to have exceeded the previous 1929 levels of output. Data cited in Peter Fearon, The origins and nature of the Great Slump, 1929-1932, Macmillan Press 1979, p11. It is important not to overlook other features of the inter-war economy as the context for the 1930s crisis, not least the damaging reparations levelled against Germany, the continued crisis in continental Europe, the speculative US boom of the 1920s and the 1929 Wall Street crash. Keynes had already made a name for himself as a critic of the German war reparations and, in 1925, for opposing Britain going back on the gold standard.
[8] For example, the various New Deal spending and investment policies enacted under US President Franklin D Roosevelt in 1933-36.
[9] Keynesianism was more or less abandoned in the 1970s as the official economic ideology, as the profitability crisis led to more aggressive moves on the part of major governments to save the system. This led to the rise of so-called ‘monetarism’. No matter what the official theory was, however, governments used their spending power to save the system as necessary, and changed tack when it was not working. The problem today is that room for more deficit spending has run out.
[10] There is coverage of this model here:
[11] For the first couple of decades after 1945, this did not seem to matter, since the destruction of war had raised profitability and created the conditions in which there could be relatively rapid growth and low unemployment levels, at least in the major capitalist countries. Ironically, this meant that despite Keynesian economics courses dominating in most universities and despite this school of thought being pervasive in government departments, there was relatively little use for Keynesian theory in managing the economy. After 1945, the share that the state spending took in the economy had risen sharply compared to the pre-war period, but there was little need for systematic deficit spending to stimulate the economy in major capitalist countries in the 1950s, nor, for many, even in the 1960s. This is indicated by the sharply falling public sector debt-to-GDP ratios for the G7 countries over this period – see the chart below.
[12] ibid.
[13] In my article ‘Anti-Bank Populism in the Imperial Heartland’, the data used are ‘historic cost’ calculations of profits divided by fixed capital assets, which I believe are the most useful guide to the long-term trend in the rate of profit. However, a ‘current cost’ of capital assets measure would probably be more relevant for estimating the potential rate of profit on new investments. This current cost measure, after tax, was 8.1% in 2009, lower than the historic cost measure at 12.5%. Even this 8.1% measure in the denominator ignores the value of ‘circulating capital’ advanced, which would give a more accurate, and lower, figure for the rate of profit. There is no special number for the rate of profit that signals a crisis, and none of these figures represents the rate of profit as conceptualised by Marx. However, it is worth noting that levels around 6-9% as measured by the current cost data in the 1970s, and in later periods, were consistent with weak investment and growth.
[14] This development of this concept was by a contemporary of Keynes, R F Kahn, and was used in Keynes’s General Theory.
[15] The final extra income of $10bn from the multiplier calculation is given by the sum of a geometric series: 1 + 1x0.9 + 1x0.9x0.9 + 1x0.9x0.9x0.9, etc, as each new recipient spends 90% of the cash. The multiplier would be 4 if the propensity to consume were 75%.
[16] See Martin Wolf, ‘Struggling with a great contraction’, Financial Times, 30 August 2011.
[17] The fall of the public sector debt ratio in the 1970s was due to a sharp rise in inflation and negative real interest rates. Actual spending deficits were much higher than the declining ratio would suggest.
[18] See Stephen G Cecchetti et al, ‘The real effects of debt’, August 2011, on the BIS website at
[19] See ‘Debt & Austerity’ 8 August 2011, on this blog.
[20] J M Keynes, The General Theory of Employment, Interest and Money, (First edition 1936) Macmillan Press 1977, Chapter 18, ‘The General Theory of Employment Re-Stated’, pp246-247.
[21] At the end of this article is a summary of a Marxist view of the dynamic of capitalism and the rate of profit.
[22] See The General Theory, pp264-270 for Keynes’s discussion of the best macroeconomic policy tactics to use in cutting real wages.
[23] In September 1936, Keynes wrote a preface to the German edition of his book that recommended his ‘theory of output as a whole’ to Germany because it was ‘easily adapted to the conditions of a totalitarian state’!
[24] He thought that, in the longer-term, real wages could rise with productivity gains. His views of employment, unemployment and the determination of wages have nothing in common with Marx’s analysis of the composition of capital and accumulation, driven by profitability.
[25] See the coverage of Stiglitz’s theory in
[26] See ‘Debt & Austerity’, 8 August 2011, on this blog.
[27] Some later parts of this text are taken from earlier articles on this blog.
[28] This is a general theoretical conclusion, one that is further endorsed by capitalism’s tendency towards destruction and war under imperialism. This is quite apart from the other trends where capitalist companies hold back productivity and progress in an attempt to protect profits, through filing protective patents, designing obsolescence into products, etc.

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