Marx vs Keynes: Where Does Economic Growth Come From? - Printable Version
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Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-11-2011 08:41 PM
Marx vs Keynes: Where Does Economic Growth Come From?
Written by Adam Booth
Thursday, 10 November 2011
“We are all Keynesians now.” So said Richard Nixon, the Republican and former President of the USA, in 1971. Forty years later, it seems that John Maynard Keynes is back in fashion, especially amongst the leaders of the British Labour movement. The reformist leaderships of the Labour Party and the trade unions cling to the Keynesian idea that the economy can simply be “stimulated” back in growing. But as the Marxists have explained before, the current economic crisis is not just part of some boom-and-slump, but is an organic crisis of capitalism, and growth cannot simply be created at will.
Assistant Secretary, U.S. Treasury, Harry Dexter White (left) and John Maynard Keynes, honorary advisor to the U.K. Treasury at the inaugural meeting of the International Monetary Fund's Board of Governors in Savannah, Georgia, U.S., March 8, 1946.
At the Labour Party conference in September 2011, Ed Balls, the Shadow Chancellor announced a new “five-point growth plan”, consisting of: repeating a tax on bankers’ bonuses; bringing forward long-term investment plans; reversing recent increases on VAT; temporarily cutting VAT on home improvements; and giving small firms that hire additional workers a one-year national insurance tax break.
The individual measures of this or that tax cut are not of great concern. What must be examined, however, is the constant talk of having “policies for growth” – a line that seems to be perpetually emanating from the mouths of the Labour Party and trade union leaders. The implication of such talk is that the Tories and other bourgeois governments are against economic growth!
Of course every economist and politician is for economic growth; life is much easier for the ruling class when the cake is getting bigger and a few more crumbs can be thrown in the direction of the masses. The problem is that growth under capitalism cannot be simply conjured up like a rabbit from a hat.
For these naive men and women in the leadership of the Labour movement, the solution to the economic crisis is simple – we must “stimulate growth”. They see the economy as like a stalled engine that simply needs a spark to get it going again. But growth under capitalism cannot be turned on and off like a tap. If growth could be created on demand, then there would never be any recessions in the first place!
Show me the money!
Keynes is most famous now for his advocacy of government intervention during the Great Depression of the 1930s, which hit a chord with leaders such as Roosevelt in the US, who implemented the “New Deal” in response to the crisis. The idea was simple: unemployment was high, and was acting as a drag on demand. The “solution” was for the government to inject a massive stimulus into the economy by initiating large-scale infrastructure and construction programmes, such as the Hoover Dam. The theory was that by reducing unemployment workers would gain wages that they could then spend in order to increase demand. The need for materials and tools in these public-works programmes also helped to fill the order books of many private companies.
The reality is, however, that the New Deal did not solve anything. The Great Depression lasted all the way up until the onset of WWII. Nevertheless, politicians and economists nowadays once again look towards the idea of a new New Deal. The only problem is, however, that governments across the world don’t have any money anymore with which to stimulate their economies. Having bailed out bank after bank, sovereign debt in the advanced capitalist countries is already too high for the nervous credit markets.
Government intervention to stimulate the economy may sound simple, but governments don’t have any money of their own to spend. At the end of the day, government spending must be financed either by taxes or by running a deficit and borrowing. But credit markets are already worried about the ability of governments to pay back their debts, hence why austerity is being forced upon populations in country after country. Meanwhile, any additional taxes must either be gained from workers or from businesses; but extra taxes on workers act like a cut into wages and thus bite into demand, defeating the original point of government stimulus (i.e. to stimulate demand), whilst higher taxes on businesses cut into profits, leading to a strike of capital and a fall in investment.
Investment and overproduction
Marx explained that it is investment in production by capitalists that is the driving force behind capitalism. The competition between different individual capitalists forces each one to invest in production in the search for higher profits. By investing in new, more productive machinery and processes, a capitalist can increase the productivity of his/her workforce, and thus produce a greater mass of commodities with fewer workers. This, in turn, allows the capitalist to decrease their costs and thus lower their prices below those offered by their rivals. In this way, an individual capitalist can gain market share and obtain super-profits. These profits are, for the most part, ploughed back into production by the capitalists, thus increasing productivity even further.
Marx also explained, however, that there are inherent contradictions in this process, arising from the fact that, on the one hand, workers are only paid back in wages a fraction of the value that they produce, i.e. the wealth that they create, but that, on the other hand, these wages ultimately form the market, i.e. the effective demand, for the commodities that they are producing. This leads to what Marx called a “crisis of overproduction”, in which capitalists cannot sell their commodities and thus realise their profits. Under capitalism, where the means of production are privately owned, production is for profit; therefore, when profit cannot be realised, production will stop and millions are consigned to unemployment.
This is the situation that the world faced during the Great Depression and that the global economy faces now. It was not the New Deal or any other Keynesian measures that pulled the world out of a depression in the 1930s, but rather it was the vast destruction of capital during WWII and the expansion of the global market following the war. These factors, amongst many others, paved the way for the “Golden Age” of capitalism in the 1950s and 60s, when the economy saw its fastest ever growth. Ted Grant explained these factors behind the post-war boom in a pamphlet entitled “Will There Be a Slump?”:
“What then are the basic reasons for the developments of the post-second world war economy?
1. The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.
2. The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations' statisticians, only disappeared in 1958.
3. The Marshall Plan and other economic aid assisted the recovery of Western Europe.
4. The enormously increased investment in industry.
5. The growth of new industry - plastics, aluminium, rockets, electronics, atomic energy and by-products.
6. The increasing output of the newer industries - chemicals, artificial fibres, synthetic rubber, plastics, rapid rise in light metals, aluminium, magnesium, electric household equipment, natural gas, electric energy, building activity.
7. The enormous amounts of fictitious capital, created by the armaments expenditure, which amount to 10 per cent of the national income in Britain and America.
8. The new market for capital and engineering products, created by the weakening of imperialism in the undeveloped countries, which has given the local bourgeoisie the increased opportunity to develop industry on a greater scale than ever before.
9. All these factors interact on one another. The increased demand for raw materials, through the development of industry in the metropolitan countries in its turn, reacts on the undeveloped countries and vice-versa.
10. The increasing trade, especially in capital goods and engineering products, between the capitalist countries, consequent on the increased economic investment, in its turn acts as a spur.
11. The role of state intervention in stimulating economic activity.
“All these factors explain the increase in production since the war. But the decisive factor has been the increased scope for capital investment, which is the main engine of capitalist development.” (Ted Grant, “Will There Be a Slump?”, 1960)
Similarly, the global economy was able to grow during the 1980s and 90s due to a combination of other factors: the expansion of the market into Russia, Eastern Europe, and China; the cheaper workforce in these countries that became available to capitalism; the squeezing of the working class in the advanced capitalist countries following the defeat of the labour movement and the breakup of the trade unions; and the use of credit to artificially expand the market.
These periods of boom are reflected in the figures for stock market returns, calculated by Credit Suisse and provided by The Economist in an article on asset returns (The Economist, 15th October 2011). Between 1949-59, real stock market returns globally were 562%. Thanks to the role of Marshall Aid and the other factors given by Ted Grant above, the figures for Germany and Japan over the same period were 4094% and 1565%. Global stock market returns were 255% in 1980-89 and 114% in 1990-99. Interestingly, The Economist does not provide the figures for 1931-38 or for 1975-79.
Depth of the crisis
Nothing demonstrates the depth of the crisis today more than the complete lack of investment by the capitalists in real production. In the same article as above, The Economist highlights that capitalists are not investing, despite profit margins that “are close to a 50-year high”. The reason for this is the excess capacity, i.e. the overproduction, that already exists within the system. Why invest in real production when there are already too many commodities being produced than can be sold?
There is plenty of money in the world, but it is concentrated into relatively few hands; hands that are unwilling and unable to invest in production. As The Economist explains:
“Almost every asset class seems to be fraught with danger. Equities have suffered two bear markets in just over a decade and remain vulnerable to a rich-world recession; government bonds offer little protection against a resurgence of inflation; commodities are volatile and hostage to a possible drop in Chinese demand; property is still suffering from indigestion after the past decade’s boom.”
Instead of investing their wealth back into production, the bourgeoisie are putting their money into speculative activity. Hence we see the rising price of gold and of other precious metals, of the Swiss franc (leading to the Swiss government actively intervening to keep their currency low) and other currencies, and of commodities such as staple foods and oil. This speculation, in turn, contributes towards inflation.
In their desperation, governments have been forced towards a policy of printing money through “quantitative easing”. They are throwing money at the capitalists, pleading with them to invest in real production, create jobs, and get the economy growing again. The capitalists, however, cannot be forced to invest their wealth. Under capitalism, investment will be done on the basis of making, increasing, and realising a profit. If this cannot be done, investment in real production will grind to a halt.
The need for socialism
The senility of capitalism and the organic nature of this crisis – a crisis of overproduction – are aptly shown by this lack of investment that one sees in the economy today. In addition, one sees the objective need for socialism, i.e. the need to invest the vast amounts of wealth that exist in society for the need of people not profit.
Instead of looking towards Keynes and trying to “stimulate growth” in the economy, the leadership of the working class should look towards Marx and take control of the commanding heights of the economy. Concretely, this means nationalising the banks and the major monopolies – without one penny of compensation for the capitalists – and using these assets to invest in what society democratically agrees is needed.
Under capitalism, the productive potential for society is hemmed in by two great contradictions: the private ownership of the means of production and the nation state. Under socialism, however, the sky is the limit.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-12-2011 04:28 AM
RE: Marx vs Keynes: Where Does Economic Growth Come From? - YaelTheGreat - 11-12-2011 04:34 AM
Looks like a good read, take a look at it tommorow.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-16-2011 05:12 AM
so? and bump
RE: Marx vs Keynes: Where Does Economic Growth Come From? - 1871 - 11-16-2011 10:12 AM
Good post Lazarus. You post knowledge that is intelligent, informative and enlightening. I am just about to check the 'favourite political system' thread.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-19-2011 12:15 AM
any disagreement with this? i really would want a discussion on this.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - shakur420 - 11-19-2011 02:48 AM
It raises questions for me, but that's cause I don't know a lot. Why is he ignoring the big elephant in the room? He talked about the war but didn't talk about the biggest government stimulus - the war itself. That's what laid the foundation for the "golden age", as I understood things. Yes, the "destruction", as he call it, created the demand as far as reconstruction goes, but without the production infrastructure already in place - created during the actual war, so they could wage it - it would've been a lot tougher to fill that demand.
The other thing is how he shits on the New Deal and government stimulus. He presents the exact reason for supporting such things, but doesn't make the connection. The New Deal was what the population achieved through popular action and yeah, it wasn't no step towards a socialist paradise or anything but it helped people not to starve, didn't it? It wasn't initiated by the government or the rich, they were forced to give people a few crumbs because of popular preassure.
He shits on government stimulus, saying that they can't afford it (like a right winger), yet ignores the fact that everybody borrows to expand. Every business, every government borrows the money to expand, to increase spending. Reading some foodservice magazine the other day, article talking about SIR corp borrowing $12 million for renovations. It's one of the biggest restaurant owners in the country, it doesn't have cash flow problems. So why would they do that? Because everyone borrows to spend. So the idea that it's not viable to borrow to provide some New Deal type stimulus just confuses me.
Plus, if the banks aren't lending, the government has many ways to force them to do it. There's a whole bunch of talk right now about how to make banks increase their lending (they're "sitting on capital", I've read about that shit the article was talking about) and make use of all the abandoned properties. In all the neighborhoods where mad people foreclosed on mortgages, property values have plummeted and there's large unemployment. One idea I saw was to tax these properties that aren't being used as a way to force the banks to sell them or rent them out. They can raise corporate taxes, drop numerous amounts of protections, they can do a lot to force creditors to lend to them if they want. I don't see how it can't be done.
I was also under the impression that Keynes was part of the "Bretton-Woods" thing, and responsible for a lot of the capital controls, the capital flight specifically. Something the wealthy wouldn't like. I thought he was against speculation and shit, like his whole idea was strong government intervention with things like that so they could direct the stimulus and growth and shit.
Plus, this guy doesn't even break down "growth", like economic growth that's good for a large part of the population (the golden age being a good example) versus the super, mutated growth that started after the 70s which only benefited the rich. Like how before the 70s, I think 90% of the global economy came from the production of goods and because of the "financialization" shift in the 70s, by '95 or something it was the opposite. 90% of the economy was based off financial transactions, speculation and shit.
This is how I understand things, don't really get what this guy's trynna say. Should Castro not pump funds into public initiatives to stimulate growth? Create jobs, control capital and stimulate industry? Really? I don't know, someone gotta explain it to me.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-20-2011 03:20 AM
summarized: economic growth comes from labor, not the bosses, so anything designed for collective economic benefits should be given to them and controlled by them (socialism).
i think that addresses most of your confusion.
(11-19-2011 02:48 AM)shakur420 Wrote: Plus, this guy doesn't even break down "growth", like economic growth that's good for a large part of the population (the golden age being a good example) versus the super, mutated growth that started after the 70s which only benefited the rich. Like how before the 70s, I think 90% of the global economy came from the production of goods and because of the "financialization" shift in the 70s, by '95 or something it was the opposite. 90% of the economy was based off financial transactions, speculation and shit.
he's addressing real economic growth.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-27-2011 12:24 AM
tomorrow we are going to discuss this in detail so i'll take some notes and come back with some new knowledge on the subject
RE: Marx vs Keynes: Where Does Economic Growth Come From? - The Vegan Marxist - 11-27-2011 01:08 AM
Here's a couple articles published by Fight Back! News, the news website for the Freedom Road Socialist Organization, the first one written also by Masao Suzuki, who's a professor of economics at Skyline College, both articles going into both Marxist and Keynesian economics:
Capitalism and Economic Stagnation
By Masao Suzuki
June 27, 2011
On June 21, the Chairman of the U.S. Federal Reserve Bank, Ben Bernanke, gave a very downbeat report on the U.S. economy following a two day meeting of the Fed. Bernanke, who is also a professor of economics, admitted that he didn’t have a good explanation for why economic growth in the United States was so weak and the unemployment rate stuck at about 9%. But Marxist political economy does have an explanation: that economic stagnation is a natural outcome of a capitalist economy.
Mainstream economics sees economic growth as natural in a capitalist economy. Free market economists blame the government for economic instability; for example they blame government housing policies, not Wall Street, for the housing boom and bust and financial crisis. Keynesian economists are more realistic in that they recognize that financial speculation can lead to a crisis, but insist that proper regulation and strong government action can stabilize a capitalist economy.
The problem is that economic instability can follow times when free market policies ruled (such as the Great Depression of the 1930s following the Roaring 20s, and the Great Financial Crisis of 2008 following decades of deregulation). Economic instability can also follow periods when Keynesian economic policies dominated (such as the decade of stagflation - recessions and inflation - of the 1970s following the post-World War II Keynesian period).
Marxist political economy sees stagnation as rooted in capitalism itself, not government policy (as do free-market economics), or lack of a strong policy (as do the Keynesians). Businesses try to lower their labor costs by cutting wages and benefits - for example more and more companies are dropping or cutting their employee health insurance and defined benefit pensions. But this limits the ability of workers to buy goods and services. At the same time businesses are constantly reinvesting their profits from cutting workers pay into new capital and new technology, becoming more productive and thus able to produce more. The contradiction between limited ability of workers to consume and the growing ability of companies to produce leads to what Marx called “crises of overproduction,” known as recessions today.
Over the last 30 years, the boom and bust cycle of capitalism has been softened by a huge build-up of debt in the United States. Between 1983 and 2007, the U.S. economy experienced two recessions (in 1990 and 2001), fewer than the post-World War II economic boom period. But at the same time total debt grew twice as fast as the economy, from 1.8 times GDP (the measure of total output of the economy) in 1983 to 3.5 times GDP in 2007. The debt boom between 1983 and 2007 was mainly in the private sector, as total (federal, state, and local) government debt grew more slowly. Government debt was 25% of total debt in 1983 but less than 15% of total debt in 2007. The fastest growth of debt was in the financial sector, which went from less than 14% of total debt in 1983 to almost one-third of total debt (32.4%) in 2007.
This huge buildup in debt ended with the debt-fueled housing boom and bust and then the financial crisis of 2008. Since then total debt has actually fallen, a huge change from the almost 9% increase in total debt each year during the 1983 to 2007 period. Financial sector debt, which was the fastest growing type of debt, actually dropped 17% from 2008 to 2010. This was largely made up by a huge increase in federal government debt of more than 47%, as seen in the large federal government budget deficits of the last few years.
But growing opposition to the growing federal debt in Congress and the administration means that the federal government debt will grow more slowly, and total debt will continue to fall. As a result the U.S. economy is likely to slow even more and could even fall back into a recession. Until and unless U.S. capitalism finds a way to grow without the stimulus from ever-greater amounts of debt, high unemployment is likely to continue for years.
United States entering a new recession?
October 5, 2011
On Sept. 30, the Economic Cycle Research Institute (ECRI) publicly stated that the United States economy was tipping into a new recession. This adds to the growing evidence of a serious slowdown in the U.S. economy, including the zero job growth and falling personal income in August as well as falling prices and sales of homes in August.
Republican presidential candidates have taken the free market view that the government is to blame for economic instability and have called for, for example, dismantling the Environmental Protection Agency (EPA) as a ‘job-killer.’ Unfortunately Democratic politicians from President Obama to California Governor Brown have also adopted this view of sacrificing the health and welfare of people in the interests of corporate profits.
These right-wing, free market views even go as far as trying to blame the boom and bust in housing prices on government-backed mortgage giants Fannie Mae and Freddie. In fact, the big boom in housing was driven by Wall Street and big banks that pushed risky and exotic mortgages from 2003 to 2007 while pushing Fannie and Freddie to the sidelines. The right wing also tries to put blame for the housing crisis on federal government efforts to increase homeownership among African Americans and other oppressed nationalities under the Democratic Clinton administration, when the big boom and bust came under Republican George Bush.
Backers of the free market view are calling for more austerity. Republican presidential candidates complain that the poor, working parents and seniors on Social Security often pay no income tax, while ignoring the payroll and sales taxes that lower income folks pay. Free marketers claim that extending unemployment insurance benefits causes unemployment by reducing people’s interest in finding a job, ignoring the fact that there are almost four people looking for a job for every job opening. They have also proposed at different times to do away with Social Security and Medicare and turning people’s retirement funds over to Wall Street and health care to private insurance companies.
Keynesian economists such as Nobel-prize winner Paul Krugman have argued that these policies of austerity are cruel and that the federal government should have spent even more, as the $800 billion economic stimulus under Obama barely offset the spending cuts and tax increases by state and local government, adding little stimulus to the economy. They correctly point out that the large U.S. government budget deficits have not increased interest rates, as the interest rate on long-term government bonds have dropped to the lowest levels in 70 years.
But the example of Japan shows that even massive government spending can fail to revive an economy. In the early 1990s the Japanese economy suffered a triple whammy of recession, a stock market crash and a bursting real estate bubble. The Japanese government borrowed and spent huge amounts, driving Japanese government debt from the lowest among the wealthier nations to the highest - it is now more than twice the size of the Japanese economy (in contrast, the U.S. government’s debt is still smaller than our economic production as measured by GDP). Nevertheless, the Japanese economy has remained in the doldrums, with only a strong export sector boosting the economy.
Marxist economics sees recession as neither caused by the government nor as curable by government spending. Rather, recessions are part and parcel of a capitalist economy where profit is the motive force. Businesses cut workers’ pay and benefits to increase their profits. But this limits their workers’ ability to buy back what they create. At the same time, these profits are reinvested in developing new technologies and expanding production. This clash - between limited ability to buy and growing ability to produce - leads to periodic crisis of overproduction, or what are called recessions.
Over the last 30 years a vast expansion of debt, especially credit cards and mortgages, has allowed workers to buy more and more despite having stagnant wages. At the same time it has been a profitable investment for capital that has had a hard time finding enough productive investments to turn a profit. But this pile of debt began to collapse with the financial crisis triggered by the collapse of the Wall Street investment bank three years ago.
Without more and more debt to stimulate the economy, it should be no surprise that the recovery from the last recession has been so weak. More than two years after the official end of the last recession, there are almost 7 million fewer jobs than before the recession started and many parts of the country are still mired in depression. More frequent recessions and quite likely worse ones are in the near future, as governments lose their will to bail out the economy and austerity measures cut spending.
The ultimate solution is that we need socialism, which includes an economy based on people’s needs, not profit. But in the meantime we also need to build a mass movement to defend the unions and social programs that have helped people raise their standard of living. Instead of cutting Medicare, we need a national health insurance program for all. Instead of cutting Social Security, we need to restore Social Security taxes on higher income individuals. Instead of closing schools and raising tuition at public colleges, the U.S. must get out of Iraq and Afghanistan.
RE: Marx vs Keynes: Where Does Economic Growth Come From? - Asshole - 11-27-2011 01:56 AM
Quote:The problem is that economic instability can follow times when free market policies ruled (such as the Great Depression of the 1930s following the Roaring 20s, and the Great Financial Crisis of 2008 following decades of deregulation). Economic instability can also follow periods when Keynesian economic policies dominated (such as the decade of stagflation - recessions and inflation - of the 1970s following the post-World War II Keynesian period).
nice! good shit man.
incidentally the canadian branch of imt is called fightback http://marxist.ca/
RE: Marx vs Keynes: Where Does Economic Growth Come From? - The Vegan Marxist - 11-27-2011 02:27 AM
Yeah, Fight Back! is the name the FRSO applied to itself after the split from the social-democratic FRSO-OSCL back in '99. FRSO-Fight Back! is strictly Marxist-Leninist. Of course, Fight Back! was only applied to represent its newspapers and the early stages after the split. Today, we prefer just referring to ourselves as the FRSO.