The crisis of bourgeois economics
Posted: Sat Jan 04, 2020 3:03 pm
(a discussion worth revisiting)
PinkoCommie
08-04-2009, 02:29 PM
The whole of this piece is a worthwhile read even if it is now almost 15 years old. Here though are some germane excerpts for those who might be hung up on "free enterprise" and similar monikers; hopefully, they'll encourage you to read the whole piece and come back to discuss your impressions:
The pre-Keynesian economic orthodoxy was what is normally called the 'neo-classical' or 'marginalist' school (although, confusingly, Keynes in his own writings usually referred to it as 'the classical school'). This arose in the 1870s and 1880s out of attempts by the Austrians Menger and Boehm Bawerk, the Englishmen Jevons and Marshall, the Frenchman Walras, the Italian Pareto, and the American Clark to resolve problems which had beset mainstream economists over the previous half century.4
Until then economists had relied on the ideas of the Scottish economist of the mid-18th century, Adam Smith, and the English economist of the early 19th century, David Ricardo. Smith and Ricardo had written at a time when modern capitalism was still fighting for supremacy with old landed and mercantile interests. Their main concerns had been with what encouraged the wealth of society to grow and what determined its distribution between the different classes in society*especially between the rising capitalist class and the old landowners. They saw an objective measure of value as a precondition for coming to terms with these issues. Smith suggested it was to be found in labour, although he failed to develop the idea consistently. Ricardo went further, and built his whole system around the notion.
But Ricardo left succeeding bourgeois economists with two major problems. One was theoretical: to explain how profits could be averaged out between industries which employed the same amount of capital but different amounts of labour.5 The other was ideological: how to provide some account, other than the robbery of one class by another, to justify the existence of profit at all. Otherwise, they would not be able to prevent radical critics of existing society from turning Ricardo's system into an attack not just on landowners but on capitalism as a whole.
For half a century bourgeois economists floundered as they tried to deal with both problems. As Marx pointed out, they alternated between a scholasticism which consisted in merely repeating abstract expressions from Ricardo, without showing how they related to concrete reality, and abandoning Ricardo's insights so as to apologise for profit. In either case, they abandoned the scientific approach to be found in Smith and Ricardo, which at least attempted to cut through superficial appearances to find underlying causes, in favour of a shallow 'vulgar economics'.
The marginalists took this process a stage further. They proclaimed they could cut through all the problems in Ricardo's system by dropping the very idea of an objective measure of value as mistaken.
But they did not reject everything said by Smith and Ricardo. They enthusiastically embraced those of their contentions which seemed to justify the untrammelled play of market forces*for instance Adam Smith's 'hidden hand' view that the best way to serve the general good was to allow free competition between producers whose only concern was with their individual interests, and Ricardo's 'theory of comparative advantage' defence of free trade. At the same time, they put at the centre of their system a 'law' promulgated by the French economist Jean-Baptiste Say and accepted by Ricardo. This held that generalised crises of overproduction were impossible because 'supply created its own demand'. The extra value of the goods produced by any firm over and above material costs, Say said, was equal to the wages paid to its workers plus the profit paid to the capitalist. So for the economy as a whole, the total amount in people's pockets from wages and profits must be exactly the same as the amount needed to buy all goods that had been produced.
Slumps, then, were logically impossible unless for some reason, a group of people were refusing to sell the goods at their disposal or to spend the money in their pockets. John Stuart Mill had expressed the prevailing view some 20 years before the marginalists developed their own ideas:
Each person's means for paying for the production of other people consists in those [commodities] that he himself possesses. All sellers are inevitably by the meaning of the word buyers... A general over-supply...of all commodities above the demand is...an impossibility... People must spend their...savings...productively; that is, in employing labour.6
The marginalists were only too happy to incorporate this view as a central feature of their own system. Where they broke with the Smith-Ricardo tradition was over what the main concern of economics should be. What mattered to them was not the creation of wealth and its distribution between classes, but rather showing that the fixing of prices through the market, without conscious human intervention, automatically led to the most efficient way of running an economy. And so they abandoned the old view of value, with its concentration on the objective necessity of labour for production...
Keynes was a trenchant critic of the notion now, popular in ruling circles once more, that the 'free market' system could automatically solve all of humanity's problems. He insisted again and again that the answer to unemployment was not to cut wages, or to provide the rich with 'incentives' for saving. And on occasions his talk of the evils of the 'free market' could sound very radical indeed. So, for instance, in a lecture in Dublin in 1933, he lambasted the orthodox economic view:
We have to remain poor because it does not 'pay' to be rich. We have to live in hovels, not because we cannot build palaces, but because we 'cannot afford' them... With what we have spent on the dole in England since the war we could have made our cities the greatest works of man in the world... Our economic system is not enabling us to exploit to the utmost the possibilities for economic wealth afforded by the progress of our technique.39
In The General Theory he is scathing about the idea that interest is a reward for the abstinence of the saver, insisting that 'interest today rewards no genuine sacrifice, any more than does the rent of land', and goes on to urge the gradual 'euthanasia' of the 'rentier' who lives off dividends.40
Yet he did not regard any of this as implying, in any sense, a revolutionary challenge to the existing economic system. 'In some respects,' he argued, his theory was 'moderately conservative in its implications'.41 All that was needed for the existing system to work was for the existing state to disregard the old orthodoxy and to intervene in economic life to raise the level of spending on investment and consumption. Two sorts of measures were necessary.
First, he argued, governments could intervene in money markets to drive down the rate of interest. This would both encourage better off people to spend rather than save their incomes, so providing a market for the output of others and encourage firms to invest*although, Keynes noted, he was 'somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest'.42
Second, governments could undertake direct expenditures of their own, to be financed by borrowing. Such 'deficit financing' would increase the demand for goods and so the level of employment. It would also pay for itself eventually through a 'multiplier effect' (discovered by Keynes' Cambridge colleague Kahn). The extra workers who got jobs because of government expenditures would spend their wages, so providing a market for the output of other workers, who in turn would spend their wages and provide still bigger markets. And as the economy expanded closer to its full employment level, the government's revenue from taxes on incomes and spending would rise, until it was enough to pay for the previous increase in expenditure.
These two measures were soon seen as the archetypical 'Keynesian' tools for getting full employment. It was these that both conservative and social democratic politicians took for granted as the key to economic management in the 1940s, 1950s, 1960s and early 1970s.
At some points in The General Theory Keynes seemed to look to more radical forms of state intervention. The state, he argued, was 'in a position to calculate' the long term results of investment, and so could take 'an ever greater responsibility for directly organising investment...'43 'I conceive' he argued,'that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment'.44 But even this did not depend on 'state socialism', since 'it is not the ownership of the instruments of production which it is important for the state to assume.'
If the state simply determined 'the aggregate resources' to be devoted to new investments, 'it will have accomplished all that is necessary'.45 So there was the possibility of 'all manner of compromises and devices by which the public authority will co-operate with private initiative', bringing about the necessary changes 'gradually and without a break in the general traditions of society'.
The 'socialisation of investment' would follow inevitably as low interest rates weakened the position of bondholders, while industrialists, dependent on government stimulation of the economy, allowed it to play an increasingly central role. There would be no need for any sort of radical break with the past.
So unrevolutionary did Keynes conceive such change to be, that he argued that once it was in place, the existing economic orthodoxy would then be applicable:
If our central controls succeed in establishing...full employment...the classical theory comes into its own again... Then there is no objection...against the classical analysis of the manner in which private interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be divided between them...46
Reform versus revolution
Keynes believed his approach was the only one which could save capitalism from itself and win young people from the lure of Marxism. A friend of Keynes at Cambridge, Julian Bell, described in 1933 how the student body was pulled sharply to the left under the impact of the world economic crisis and the rise of fascism in Europe:
In the Cambridge that I first knew in 1929 and 1930...as far as I can remember we hardly ever talked or thought about politics. By the end of 1933 we have arrived at a situation in which the only subject of discussion is contemporary politics, and which a very large majority of the more intelligent undergraduates are Communists or almost Communists.47
This state of affairs horrified Keynes, 'who was scathing in his attacks on Marxism'. He told Bell that Communism was a 'religion', and that 'Marxism was the worst of all, and founded on a mistake of old Mr Ricardo's'.48 He claimed in a letter to Bernard Shaw at the beginning of 1935 that his new theory would 'knock away...the Ricardian foundations of Marxism'.49 Later in the year he told students, 'Marxism...was complicated hocus pocus, the only value of which was its muddleheadedness.'
He put his argument rather more logically during a series of lectures outlining his new theory in 1934. Marxism, he argued, was wrong because it accepted, as much as the neo-classical orthodoxy, that state intervention could not improve the operations of capitalism:
The Marxists have become the ultra-orthodox economists. They take the Ricardian argument to show that nothing can be gained from interference. Hence, since things are bad and mending is impossible, the only solution is to abolish [capitalism] and have quite a new system. Communism is the logical outcome of the classical theory.50
He believed his 'general theory' showed how capitalism could be saved by relatively simple reforms, and that therefore the Marxists were fundamentally mistaken. It was an argument some at least of the 1930s left wing intellectuals accepted, especially as they became disillusioned with Stalinism after the Stalin-Hitler pact in 1939. And it was a view which spread when the boom of the post-war failed to give way to the imminent slump many predicted.
In Britain, John Strachey had been by far the best known Marxist writer on economics in the 1930s. His The Nature of the Capitalist Crisis, The Coming Struggle for Power and The Theory and Practice of Socialism had taught Marxist economics to a whole generation of worker activists and young intellectuals. Yet by 1956 he was arguing, in his Contemporary Capitalism, that Keynes had been right and Marx wrong on the crucial question of whether the capitalist crisis could be reformed away: 'There are no specifically economic fallacies in the Keynesian case... If the Keynesian remedies can be applied they will have broadly the predicted effects'.51
Keynes's only mistake, Strachey held, was that he thought the capitalists or their political parties would introduce such remedies of their own volition. In fact it required pressure from below, from the workers' parties and unions. 'The Keynesian remedies...will be opposed by the capitalists certainly: but experience shows they can be imposed by the electorate'.52 Keynes helped 'the democratic and democratic socialist forces to find a way of continuously modifying the system, in spite of the opposition of the capitalist interests... And in doing so he helped show the peoples of the West a way forward which did not lead across the bourne of total class war...'53
Strachey was articulating what became the conventional social democratic argument throughout the 1950s and 1960s. Capitalism had experienced a deep slump in the inter-war years and governments had been unable to cope. But this was not because of the intrinsic faults of capitalism as a system. It was because governments had adopted the wrong policies, imprisoned by a hidebound doctrine that led them to cut public expenditure and wages, pushing down consumption when really the need was to do the opposite. They need never make the mistake again, now that Keynes's theory had provided them with a new intellectual tool for understanding what was happening. Indeed, it was said, British governments need not have made the mistake in the inter-war years themselves since, even before he published The General Theory, Keynes had advised them against going on the Gold Standard in 1926 and cutting public expenditure to balance the budget in 1931.
It is an argument which people like The Observer editor Will Hutton try to revive today when they argue that, if only governments would abandon 'dogma' and follow in Keynes's footsteps, there would be an alternative to economic crisis and social deterioration. But there is one glaring fault with this argument. It does not take into account what really happened, either in the inter-war years or during the long post-war boom.
http://pubs.socialistreviewindex.org.uk ... harman.htm
PinkoCommie
08-04-2009, 02:29 PM
The whole of this piece is a worthwhile read even if it is now almost 15 years old. Here though are some germane excerpts for those who might be hung up on "free enterprise" and similar monikers; hopefully, they'll encourage you to read the whole piece and come back to discuss your impressions:
The pre-Keynesian economic orthodoxy was what is normally called the 'neo-classical' or 'marginalist' school (although, confusingly, Keynes in his own writings usually referred to it as 'the classical school'). This arose in the 1870s and 1880s out of attempts by the Austrians Menger and Boehm Bawerk, the Englishmen Jevons and Marshall, the Frenchman Walras, the Italian Pareto, and the American Clark to resolve problems which had beset mainstream economists over the previous half century.4
Until then economists had relied on the ideas of the Scottish economist of the mid-18th century, Adam Smith, and the English economist of the early 19th century, David Ricardo. Smith and Ricardo had written at a time when modern capitalism was still fighting for supremacy with old landed and mercantile interests. Their main concerns had been with what encouraged the wealth of society to grow and what determined its distribution between the different classes in society*especially between the rising capitalist class and the old landowners. They saw an objective measure of value as a precondition for coming to terms with these issues. Smith suggested it was to be found in labour, although he failed to develop the idea consistently. Ricardo went further, and built his whole system around the notion.
But Ricardo left succeeding bourgeois economists with two major problems. One was theoretical: to explain how profits could be averaged out between industries which employed the same amount of capital but different amounts of labour.5 The other was ideological: how to provide some account, other than the robbery of one class by another, to justify the existence of profit at all. Otherwise, they would not be able to prevent radical critics of existing society from turning Ricardo's system into an attack not just on landowners but on capitalism as a whole.
For half a century bourgeois economists floundered as they tried to deal with both problems. As Marx pointed out, they alternated between a scholasticism which consisted in merely repeating abstract expressions from Ricardo, without showing how they related to concrete reality, and abandoning Ricardo's insights so as to apologise for profit. In either case, they abandoned the scientific approach to be found in Smith and Ricardo, which at least attempted to cut through superficial appearances to find underlying causes, in favour of a shallow 'vulgar economics'.
The marginalists took this process a stage further. They proclaimed they could cut through all the problems in Ricardo's system by dropping the very idea of an objective measure of value as mistaken.
But they did not reject everything said by Smith and Ricardo. They enthusiastically embraced those of their contentions which seemed to justify the untrammelled play of market forces*for instance Adam Smith's 'hidden hand' view that the best way to serve the general good was to allow free competition between producers whose only concern was with their individual interests, and Ricardo's 'theory of comparative advantage' defence of free trade. At the same time, they put at the centre of their system a 'law' promulgated by the French economist Jean-Baptiste Say and accepted by Ricardo. This held that generalised crises of overproduction were impossible because 'supply created its own demand'. The extra value of the goods produced by any firm over and above material costs, Say said, was equal to the wages paid to its workers plus the profit paid to the capitalist. So for the economy as a whole, the total amount in people's pockets from wages and profits must be exactly the same as the amount needed to buy all goods that had been produced.
Slumps, then, were logically impossible unless for some reason, a group of people were refusing to sell the goods at their disposal or to spend the money in their pockets. John Stuart Mill had expressed the prevailing view some 20 years before the marginalists developed their own ideas:
Each person's means for paying for the production of other people consists in those [commodities] that he himself possesses. All sellers are inevitably by the meaning of the word buyers... A general over-supply...of all commodities above the demand is...an impossibility... People must spend their...savings...productively; that is, in employing labour.6
The marginalists were only too happy to incorporate this view as a central feature of their own system. Where they broke with the Smith-Ricardo tradition was over what the main concern of economics should be. What mattered to them was not the creation of wealth and its distribution between classes, but rather showing that the fixing of prices through the market, without conscious human intervention, automatically led to the most efficient way of running an economy. And so they abandoned the old view of value, with its concentration on the objective necessity of labour for production...
Keynes was a trenchant critic of the notion now, popular in ruling circles once more, that the 'free market' system could automatically solve all of humanity's problems. He insisted again and again that the answer to unemployment was not to cut wages, or to provide the rich with 'incentives' for saving. And on occasions his talk of the evils of the 'free market' could sound very radical indeed. So, for instance, in a lecture in Dublin in 1933, he lambasted the orthodox economic view:
We have to remain poor because it does not 'pay' to be rich. We have to live in hovels, not because we cannot build palaces, but because we 'cannot afford' them... With what we have spent on the dole in England since the war we could have made our cities the greatest works of man in the world... Our economic system is not enabling us to exploit to the utmost the possibilities for economic wealth afforded by the progress of our technique.39
In The General Theory he is scathing about the idea that interest is a reward for the abstinence of the saver, insisting that 'interest today rewards no genuine sacrifice, any more than does the rent of land', and goes on to urge the gradual 'euthanasia' of the 'rentier' who lives off dividends.40
Yet he did not regard any of this as implying, in any sense, a revolutionary challenge to the existing economic system. 'In some respects,' he argued, his theory was 'moderately conservative in its implications'.41 All that was needed for the existing system to work was for the existing state to disregard the old orthodoxy and to intervene in economic life to raise the level of spending on investment and consumption. Two sorts of measures were necessary.
First, he argued, governments could intervene in money markets to drive down the rate of interest. This would both encourage better off people to spend rather than save their incomes, so providing a market for the output of others and encourage firms to invest*although, Keynes noted, he was 'somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest'.42
Second, governments could undertake direct expenditures of their own, to be financed by borrowing. Such 'deficit financing' would increase the demand for goods and so the level of employment. It would also pay for itself eventually through a 'multiplier effect' (discovered by Keynes' Cambridge colleague Kahn). The extra workers who got jobs because of government expenditures would spend their wages, so providing a market for the output of other workers, who in turn would spend their wages and provide still bigger markets. And as the economy expanded closer to its full employment level, the government's revenue from taxes on incomes and spending would rise, until it was enough to pay for the previous increase in expenditure.
These two measures were soon seen as the archetypical 'Keynesian' tools for getting full employment. It was these that both conservative and social democratic politicians took for granted as the key to economic management in the 1940s, 1950s, 1960s and early 1970s.
At some points in The General Theory Keynes seemed to look to more radical forms of state intervention. The state, he argued, was 'in a position to calculate' the long term results of investment, and so could take 'an ever greater responsibility for directly organising investment...'43 'I conceive' he argued,'that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment'.44 But even this did not depend on 'state socialism', since 'it is not the ownership of the instruments of production which it is important for the state to assume.'
If the state simply determined 'the aggregate resources' to be devoted to new investments, 'it will have accomplished all that is necessary'.45 So there was the possibility of 'all manner of compromises and devices by which the public authority will co-operate with private initiative', bringing about the necessary changes 'gradually and without a break in the general traditions of society'.
The 'socialisation of investment' would follow inevitably as low interest rates weakened the position of bondholders, while industrialists, dependent on government stimulation of the economy, allowed it to play an increasingly central role. There would be no need for any sort of radical break with the past.
So unrevolutionary did Keynes conceive such change to be, that he argued that once it was in place, the existing economic orthodoxy would then be applicable:
If our central controls succeed in establishing...full employment...the classical theory comes into its own again... Then there is no objection...against the classical analysis of the manner in which private interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be divided between them...46
Reform versus revolution
Keynes believed his approach was the only one which could save capitalism from itself and win young people from the lure of Marxism. A friend of Keynes at Cambridge, Julian Bell, described in 1933 how the student body was pulled sharply to the left under the impact of the world economic crisis and the rise of fascism in Europe:
In the Cambridge that I first knew in 1929 and 1930...as far as I can remember we hardly ever talked or thought about politics. By the end of 1933 we have arrived at a situation in which the only subject of discussion is contemporary politics, and which a very large majority of the more intelligent undergraduates are Communists or almost Communists.47
This state of affairs horrified Keynes, 'who was scathing in his attacks on Marxism'. He told Bell that Communism was a 'religion', and that 'Marxism was the worst of all, and founded on a mistake of old Mr Ricardo's'.48 He claimed in a letter to Bernard Shaw at the beginning of 1935 that his new theory would 'knock away...the Ricardian foundations of Marxism'.49 Later in the year he told students, 'Marxism...was complicated hocus pocus, the only value of which was its muddleheadedness.'
He put his argument rather more logically during a series of lectures outlining his new theory in 1934. Marxism, he argued, was wrong because it accepted, as much as the neo-classical orthodoxy, that state intervention could not improve the operations of capitalism:
The Marxists have become the ultra-orthodox economists. They take the Ricardian argument to show that nothing can be gained from interference. Hence, since things are bad and mending is impossible, the only solution is to abolish [capitalism] and have quite a new system. Communism is the logical outcome of the classical theory.50
He believed his 'general theory' showed how capitalism could be saved by relatively simple reforms, and that therefore the Marxists were fundamentally mistaken. It was an argument some at least of the 1930s left wing intellectuals accepted, especially as they became disillusioned with Stalinism after the Stalin-Hitler pact in 1939. And it was a view which spread when the boom of the post-war failed to give way to the imminent slump many predicted.
In Britain, John Strachey had been by far the best known Marxist writer on economics in the 1930s. His The Nature of the Capitalist Crisis, The Coming Struggle for Power and The Theory and Practice of Socialism had taught Marxist economics to a whole generation of worker activists and young intellectuals. Yet by 1956 he was arguing, in his Contemporary Capitalism, that Keynes had been right and Marx wrong on the crucial question of whether the capitalist crisis could be reformed away: 'There are no specifically economic fallacies in the Keynesian case... If the Keynesian remedies can be applied they will have broadly the predicted effects'.51
Keynes's only mistake, Strachey held, was that he thought the capitalists or their political parties would introduce such remedies of their own volition. In fact it required pressure from below, from the workers' parties and unions. 'The Keynesian remedies...will be opposed by the capitalists certainly: but experience shows they can be imposed by the electorate'.52 Keynes helped 'the democratic and democratic socialist forces to find a way of continuously modifying the system, in spite of the opposition of the capitalist interests... And in doing so he helped show the peoples of the West a way forward which did not lead across the bourne of total class war...'53
Strachey was articulating what became the conventional social democratic argument throughout the 1950s and 1960s. Capitalism had experienced a deep slump in the inter-war years and governments had been unable to cope. But this was not because of the intrinsic faults of capitalism as a system. It was because governments had adopted the wrong policies, imprisoned by a hidebound doctrine that led them to cut public expenditure and wages, pushing down consumption when really the need was to do the opposite. They need never make the mistake again, now that Keynes's theory had provided them with a new intellectual tool for understanding what was happening. Indeed, it was said, British governments need not have made the mistake in the inter-war years themselves since, even before he published The General Theory, Keynes had advised them against going on the Gold Standard in 1926 and cutting public expenditure to balance the budget in 1931.
It is an argument which people like The Observer editor Will Hutton try to revive today when they argue that, if only governments would abandon 'dogma' and follow in Keynes's footsteps, there would be an alternative to economic crisis and social deterioration. But there is one glaring fault with this argument. It does not take into account what really happened, either in the inter-war years or during the long post-war boom.
http://pubs.socialistreviewindex.org.uk ... harman.htm