Keynesian economic policies don’t work, but fighting for these policies will?
Guglielmo Carchedi’s essay on the so-called Marxist multiplier has me bugging. He is handing out bad advice to activists in the social movements and telling them this bad advice is based on Marx’s labor theory of value. The bad advice can be summed up concisely: Keynesian policies do not work and cannot work, but the fight for these policies (as opposed to neoliberal policies) can help end capitalism:
From the Marxist perspective, the struggle for the improvement of labour’s lot and the sedimentation and accumulation of labour’s antagonistic consciousness and power through this struggle should be two sides of the same coin. This is their real importance. They cannot end the slump but they can surely improve labour’s conditions and, given the proper perspective, foster the end of capitalism.
Frankly, Carchedi’s advice is the Marxist academy’s equivalent of medical malpractice. (For the record, Michael Robert’s has his own take on the discussion raised by Carchedi’s essay.)
Carchedi is trying to describe how Keynesian economic policies (i.e., the fascist state) functions and why these policies don’t work. This is a task much bigger than you might expect since the problem confronting Carchedi is the simple fact that Keynesian policies have indeed “worked” for the last 80 years — over the last 80 years, until the crisis beginning with 2007 until now, the world market has not seen an outbreak of depression on the scale of the 1930s. There has been no replay of the massive economic dislocation of the period: unemployment, mass bankruptcies and bank failures, etc.
Carchedi asserts a crisis like the Great Depression can be traced to the law of the tendency toward a fall in the rate of profit. The background explaining this law, which dates to Adam Smith at least, can be found here. Economists prior to Marx noticed the tendency of the rate of profit to fall over time and had various explanations for it. Marx had his own version which essentially stated that, over time, the amount of living labor added to a commodity declined as capitalism increased the productivity of labor. Since labor is the only source of profit (surplus value), the fall in the quantity of new labor added to commodities would result in a decline in profits squeezed from the new labor added in the course of its production. (I hope I did not do too great an injury to his argument here. In any case read the wiki.)
More of the value contained in a commodity would be the machinery, raw materials, etc. used up in the production of the commodity. Less of the value contained in it would be the newly added labor used up creating the commodity. The capitalist who measured his profit in terms of return on both the machinery etc. (constant capital) and the labor power (variable capital) invested would experience a decline in his rate of profit over the long term. This fall would periodically lead to crises as the rate of profit fell — ultimately, it must lead to the demise of capitalism itself..
Carchedi employs Marx’s argument to describe how Keynesian policies work:
“If falling profitability is the cause of the slump, the slump will end only if the economy’s profitability sets off on a path of sustained growth. Then the relevant question is: can Keynesian policies restore the economy’s profitability? Can they end the slump?”
Carchedi’s question is terribly framed, I think, since (it appears) he is trying to avoid being very dense and technical in his discussion. The “economy” is made up of many sorts of organizations in addition to capitals — for example, non-profits, governments, co-ops, individual producers etc. We are not concerned with these organizations, but only capitals and the way they work.
Second, in Carchedi’s argument the term “profitability” is used ambiguously: Marx refers to both the rate and the mass of profits. A tiny capital with a very high rate of profit cannot produce as much profit as a very large capital with a low rate of profit. For instance, a capital of $100 that produces an additional $100 of profit — a 100% rate of profit — cannot be compared to a capital of $5000 that produces $500 — a 10% rate of profit. Although the smaller capital has a much higher rate of profit, the larger capital still produces 5 times as much profit. We are concerned not just with the rate of profit but also with the mass of profit. Carchedi never explains this difference in his argument.
These two difficulties hamper Carchedi’s argument from the very beginning as I will show. It leads him to argue Keynesian policies do not “work”, when in fact they “work” very well. The fact that they “worked” for 80 years is significant for us precisely because it is these policies that failed to “work” in this crisis. The fact that the policies failed in this crisis has much greater significance to anti-statists than if they had never worked at all.
How significant is this fact? It is probably the most significant fact to emerge out of the 20th century: Were it not for Keynesian economic policies, capitalism would have never survived the Great Depression. The collapse of the policies in this crisis, therefore, call into question capitalism’s continuing survival
No difference between neoliberalism and Keynesianism
Carchedi defines Keynesian economic policies as state-induced income redistribution or investment that is financed by the two social classes for projects determined by the state. He makes a distinction between whether these projects are financed by capital or labor, but I am not sure what his point is in this. Even if the state only financed its projects by taxing the profits of capital, the ultimate source of those profits is still labor. This shows another flaw in Carchedi’s reasoning: he proposes there is some dividing line between neoliberal and Keynesian policies. In fact there is no such dividing line.
Carchedi also accepts the false distinction between civilian and military projects, despite the fact state projects like the National Defense Highway System are “dual use” — as is the internet, the airline industry, microprocessors, etc. Additionally, I am not sure there is a distinction to be made between income redistribution and investment as Carchedi makes. For instance, Carchedi notes in his passage on investment:
“Under capitalism value is realised only if and when it is metamorphosed into money through the sale of the use value in which it is incorporated. Since the state does not sell public works (unless it privatises them, but privatisation falls outside our present scope), it would seem that that value remains potential, trapped in an unsold use value.”
So, according to Carchedi, fascist state “investment” produces no commodity and, therefore, cannot be seen as a form of capital investment.
There is no investment — but what of “income redistribution”? Even if the fascist state does not “invest”, perhaps it can redistribute income between the two classes — labor and capital? Well, no: as Carchedi notes, fascist state economic policies can neither bring about a redistribution of income from capital to labor nor vice versa. On the redistribution of income from capital to labor Carchedi argues:
“Contrary to the Keynesian approach, higher wages at the cost of capital contribute not to the movement towards equilibrium and growth but to the movement towards depression and crises.”
On the redistribution of income from labor to capital, Carchedi notes:
“In a crisis, if the demand for consumer goods falls due to lower wages, the extra profits from lower wages are not reinvested in that sector and thus cannot spur investment in the production of means of consumption. Moreover, capital does not disinvest in sector II and invest in sector I because profitability also falls in sector I. The extra profits are either set aside as reserves or invested in the unproductive sectors…”
80 years of state induced employment growth
Based on Carchedi’s own argument, I conclude the 80 years of uninterrupted “economic growth” since the Great Depression has not been the result of fascist state “investment” or “income redistribution”. Despite this, however, we have had 80 years of uninterrupted “economic growth”, i.e., a growth in both employment and output. All Carchedi proved by this examination is that Keynesian economic policies don’t work the way Keynesians says it does. The fact that both employment and output have expanded over the last 80 years is not subject to any dispute whatsoever, despite the fact that the Keynesian explanation of this growth fails to account for it.
Here is the data provided by the Bureau of Labor Statistic on total nonfarm payroll since 1939:
All Carchedi has told us is that Keynesian talking points cannot account for this data — and he leaves it at that. But the data is still there and requires an explanation. Carchedi made a weak-assed attempt to half explain the data before 1970:
“The example usually mentioned is the long period of prosperity that followed the Second World War, the so-called Golden Age of capitalism. Supposedly, government borrowing made it possible for the US state to finance Keynesian policies and thus to start the long period of prosperity. In reality, the US gross federal debt as a percentage of GDP decreased constantly during the Golden Age, from 121.7 percent in 1946 to 37.6 percent in 1970. The long spell of prosperity was due to reconversion, i.e. to the reconstitution of civilian capital, and to the liberation of pent-up purchasing power after the war.”
Okay, that might explain employment growth from 1939 to 1970:
But what explains this employment growth from 1971-2012?:
And why, for the first time beginning in 2007, has employment not recovered to its former level after five years unlike all previous declines in post-war employment?
As Carchedi explains, the standard Keynesian boilerplate is that there has not been enough fascist state intervention in the economy:
“The thesis that state-induced redistribution and investment policies, possibly through state borrowing, could start a sustained recovery, provided the scale is sufficiently large, is not only theoretically invalid (see above) but also empirically unsubstantiated.”
This is important for activists in the movements like Occupy to understand and must be emphasized. However without a real counter-argument to Keynesian ideologues like Paul Krugman or innumerable Marxist variants, activists will inevitably fall back on that explanation for lack of another. Their only other choice is the Austrian argument, which, like Carchedi, also simply states Keynesian economic theory cannot work — despite the fact it has been working for 80 years and this effectiveness can be empirically demonstrated.
Moreover, we have notable and influential voices like Noam Chomsky telling folks to vote Democrat in swing states because this is better than the GOP. Why? Because the effectiveness of Keynesian policies is indisputable. This shows why the lack of an answer to both Keynesian economic theory and Austrian economic theory is problematic. It is necessary to explain why Keynesian or neoliberal economic theory worked for 80 years and also why it doesn’t work now.
Superfluous labor time and the fascist state
The key to understanding this is precisely what Carchedi fumbles in his argument — Marx’s law of the tendency of the rate of profit to fall. Marx shows that this law produces crises, but he also makes a more important argument for this crisis:
“… the rate of self-expansion of the total capital, or the rate of profit, being the goad of capitalist production (just as self-expansion of capital is its only purpose), its fall checks the formation of new independent capitals and thus appears as a threat to the development of the capitalist production process. It breeds over-production, speculation, crises, and surplus-capital alongside surplus-population.”
Marx’s argument suggests Keynesian economic policies are not “financed” either by labor or capital in general, but by the surplus-capital and overpopulation of workers. Which is to say, it is not labor and capital in general that “finances” fascist state economic policies, but only the surplus of these two. This is both capital and labor power that are no longer able to function productively as capital and labor power, and which, as a result, can be employed by the fascist state for its own ends.
This is why it makes no sense to talk about “the economy” when this economy encompasses both productively employed capital but also capital that can no longer be employed productively. Speaking of “the economy” already conflates two categories of labor time that never should be confused: socially necessary labor time and superfluous labor time.
In Keynesian and Austrian economic theory there is no distinction to be made in these two forms of labor time. Only Marx’s theory makes this distinction — although you would never know this to read the crap written by the Marxist Academy. Once we integrate Marx’s concept of superfluous labor time into Carchedi’s critique of Keynesian economic theory the mystery of how Keynesian economic policies work is solved. As the economist Kalecki argued,
“public investment should be confined to objects that don’t compete with the equipment of private business. Otherwise, the profitability of private investment might be impaired and the effect of public investment upon employment offset by the negative effect of the decline in private investment”.
Stated directly: capital already rendered superfluous by the progress of capitalist production must be placed at the disposal of the fascist state in the form of loaned capital or cease to be capital entirely. It can only become capital insofar as it is loaned to the fascist state and can by this means accrue interest. Which is to say, this capital is entirely fictitious.
Why must this surplus capital be loaned to the fascist state? As Carchedi explains, a restoration of the mass of profits can only be accomplished through the actual destruction of capital:
“In fact, we have seen that state-induced capital-financed investment cannot restart the economy. At most, it can postpone the explosion of the crisis. Then, if either pro-labour or pro-capital anti-crisis policies are impotent against the slump, the crisis must run its course until it itself creates the condition of its own solution. This is the destruction of capital. Only when sufficient (backward) capitals have been destroyed (have gone bankrupt) can the more efficient productive units start producing again on an enlarged scale.”
Carchedi argues on this basis that fascist state economic policies only postpone the explosion but does not stop it. I think he is completely wrong in this assertion: fascist state economic policies work precisely because they accelerate the destruction of capital. The problem here is that fascist state economic policies must both destroy capital and at the same time maintain or even increase the mass of profits. How the state simultaneously destroys capital and maintains/increases profits is the most difficult thing to uncover in political-economy.
Unmasking the Keynesian destruction of capital
The problem is difficult to uncover because it is masked by money-relations, so that the process is concealed from us. However Carchedi provides us with an important clue:
“Some Keynesian authors propose to stimulate demand neither through redistribution nor through investments but by increasing the quantity of money.”
Since profits have to take the form of money, maintaining or increasing the mass of profits must necessarily involve manipulation of the supply of money in circulation. However, the objection to this argument by the Austrians is entirely correct: increasing the quantity of money will only increase inflation. However, rather than agreeing with the Austrians on this point and disclosing why maintaining a stable rate of inflation has been a fundamental feature of fascist state economic policy, Carchedi argues instead that increasing the quantity of money in circulation only increases the representations of money, not money itself. This is a very odd objection, since in Marx’s theory of money all money in circulation is simply a symbol or token of money. Even gold becomes a token of itself when in circulation — there is no grounds to disagree with the Austrians on this point.
Carchedi then adds:
“The economy cannot restart if the surplus value produced relative to the capital invested is unchanged.”
This is not correct, I think. As Carchedi notes throughout his essay, the increase in production is tied to the increase in profits, not the increase in surplus value. To give an example of how this works and why the distinction must be made: In the case of export of capital there is no change in the quantity of surplus value produced but in the quantity that is realized as profit. So if the fascist state prints “money” it may increase the mass of profits realized without having any effect on the mass of surplus value. The question to consider is how and under what circumstances this might be true. If at the same time the fascist state destroyed capital but also increased the mass of profits, Keynesian policies would “work”.
Our difficulty then consists of demonstrating how this destruction of productive capital results from one and the same transaction.
The problem is simplified by the fact Carchedi makes most of my argument for me: first, that the state does not produce a commodity nor does it realize the value of its activity in a sale; second, that the state can neither increase profits by redistribution nor by investment; third, that the state “does not ‘create money out of nothing’, an absurd proposition. Out of nothing, one can create nothing.”
If these three propositions of Carchedi are true, then by definition money-capital loaned to the state is never repaid and only reappears in the hands of the lender through taxes or printing dollars. The original money-capital is destroyed — consumed without being replaced in circulation by new value — and replaced by valueless tokens, new debt or tax revenue. The money-capital lent to the state is employed as it is with money-capital lent to the industrial capitalist — it is spent on commodities. Not a cent of this loaned money-capital is returned to the lender; instead, in the case of the industrialist, this money-capital is replaced by the new surplus value the industrialist realizes as a result of the production of commodities and their sale in the market. Since in Carchedi’s argument there is no commodity production carried on by the state, nor the sale of commodities, the state cannot replace the money-capital with the results of a production process. It can only replace this original value with tax revenues, more debt, or printing money.
When Carchedi argues that creating money out of nothing is an absurdity, he is right but his objection is completely irrelevant. All the fascist state need be able to do is create dollars out of nothing, a capacity falling fully within its domain as the state. Once in circulation these new counterfeit dollars are indistinguishable from the existing stock of dollars and only express their fictitious quality through a general depreciation of the purchasing power of all dollars.
If, on the one hand, the state borrows from the existing mass of money-capital, but, on the other hand, pays back this loan with valueless dollars created out of nothing, in one and the same transaction real money-capital is destroyed but the mass of money profits is increased. All that is required for this to occur is already given in Marx’s law of the tendency of the rate of profit to fall, which produces not only crises but a mass of surplus capital that no longer functions as capital, and which must be loaned to the state to accrue interest.
Washington’s unique position as a fascist state
Of course, Carchedi might object,
“But eventually debts must be repaid. The Keynesian argument is that debts can be repaid when, due to these policies, the economy restarts and the appropriation of the surplus value needed for debt repayment does not threaten the recovery.”
I think he is both right and wrong on this point: insofar as concerns fascist states other than Washington, the debt must be repaid. This is the crisis Greece, Spain and Portugal are passing through currently — the previous debts were no more than postponement of the crisis produced by the falling rate of profit that had to surface eventually. Although these states could postpone the crisis by accumulating debt, eventually they would have to raise taxes or reduce spending as is the case with any other subprime borrower.
However this problem should not be generalized: Germany and China, for example, have trade surpluses to satisfy their debt service. As long as they have these trade surpluses, the fascist state in those countries can continue to accumulate debt to offset a falling rate of profit. This is already accounted for in Marx’s theory as an attempt to resolve the falling rate of profit through the export of capital. Says Marx:
“This internal contradiction seeks to resolve itself through expansion of the outlying field of production.”
“If capital is sent abroad, this is not done because it absolutely could not be applied at home, but because it can be employed at a higher rate of profit in a foreign country. But such capital is absolute excess capital for the employed labouring population and for the home country in general. It exists as such alongside the relative over-population, and this is an illustration of how both of them exist side by side, and mutually influence one another.”
Thus we find among the euro-zone nations of the South a concerted push to lower their labor costs through drastic inhumane policies aimed at increasing their “international competitiveness” — policies which, even if successful, must only intensify the present crisis by throwing still more excess capital onto the world market .
Finally, Carchedi’s objection is not true with regards to Washington, which also runs a trade deficit like Greece, Spain and Portugal, but is able, despite this, to accumulate debt without suffering their fate. Washington’s ability to do this is not based on a trade surplus but on the fact that its currency is the world reserve currency — a position it guards jealously from all competitors. Through Washington’s control of the dollar it can behave toward the rest of the world market as each nation in this world market has behaved toward its own working class population — compelling them to work longer and harder for less wages.
I think Carchedi only performed half of his job in his essay and did even that badly. Moreover, even beyond his errors in describing how Keynesian policies actually really do work and have worked for 80 years, on the basis of his flawed argument Carchedi cannot explain what is new and important in this crisis: the collapse of fascist state economic policy.
Activists should understand (if they don’t already) that this time it is different: this isn’t an “ordinary” crisis, it is historically unique. Marxist scholars haven’t been able to tell activists this because the Marxists don’t realize it themselves. Marxists really do believe that capitalism is going to cheat the inevitable again like the Perils of Pauline. Because he does not know what is different about this crisis, the advice Carchedi gives to activists is fundamentally wrong:
“The above should not be construed as if labour should be indifferent to state-induced capital-financed redistribution and/or investment policies. On the contrary, labour should strongly struggle for such policies. But this struggle should be carried out not from a Keynesian perspective but from the proper, Marxist, perspective.”
This is exactly the opposite of good advice based on Marx’s labor theory of value. That theory suggests activists should be completely indifferent between any state policies — Keynesian or neoliberal — to address this crisis and OPPOSED to them all. This is a crisis of fascist state management of the capitalist mode of production and activists should direct their attention to actually superseding the mode of production.
Tags: budget deficit, capital, debt, Depression, economic policy, Employment, falling rate of profit, financial crisis, great depression, Guglielmo Carchedi, inflation, Karl Marx, Keynesian economics, Marxism, neoliberalism, political-economy, unemployment