Marxism without revolution: Crisis

by John Quiggin on June 25, 2011

I’m writing series of posts examining the question – what is left of Marxism, as a way to understand the world, and as a way to change it, once it is accepted that capitalism is not going to be overthrown by a working class revolution. Last time I talked about class. This post is about crisis. As before, the shorter JQ is “there are lots of valuable insights, but there’s a high risk of political paralysis.”

One of the most powerful feature of Marxian analysis is the idea that crisis is a normal part of capitalism rather than an aberration resulting from exogenous shocks. Marx asserts that crises arise from inherent contradictions in the system and proposes a dialectical account by which the resolution of one crisis produces the contradictions that set the scene for the next. That seems to me to remain valuable

On the other hand, the central point of Marx’s theory of crisis was the claim that crises would grow steadily more intense, driven by the declining rate of profit, until they brought about the revolutionary overthrow of the system. Hence, despite the short-term suffering they caused, crises were to be welcomed as steps on the path to the inevitable downfall of the system.

Once the link between crisis and revolution is abandoned, it is necessary to reconsider the whole analysis of crises. Without the declining rate of profit and the inevitable progress towards revolution, it is obvious that different crises have had different effects on class relations.

Some, such as the Great Depression, weakened the position of the dominant class, giving rise to the New Deal in the US and social democratic reforms in other developed countries

Other crises, such as that the 1970s have strengthened the dominant class. The failure of Keynesian stabilization policy paved the way for the resurgence of market liberalism, the set of ideas I discussed in Zombie Economics, most of which is online here.

The Global Financial Crisis, which initially seemed (to me at any rate) likely to bring an end to the dominance of the financial elite, has so far reinforced it, though it will be quite a while before the final whistle blows.

Standard Marxist analyses don’t deal with this very well, in my view. The tendency is always to present the response to each crisis in terms of increasing exploitation, and of papering over the cracks in a system that is doomed to inevitable failure. After three hundred years of such crises (if you start with the South Sea Bubble), it’s necessary to work on the hypothesis that crises are inherent features of the capitalist system.

The problems with the standard Marxist approach were evident in the response of the German Social Democrats to the Great Depression, which we discussed in the seminar on Sheri Berman’s book The Primacy of Politics The orthodox Marxist response, exemplified by the leading Social Democrat theorist Hilferding was that within the system, there was no alternative to ‘sound finance’. The revisionist Swedish Social Democrats weren’t so constrained and produced a response that was social democratic in the modern sense of the term.

Closely related is the question of what, if anything, can and should be done to stabilise the capitalist economy. The orthodox Marxist answer, it seems to me, is the same as that of classical economics, namely “Nothing”. By contrast, I read the historical evidence as showing that the system can and should be stabilised to a significant extent, as was done during the postwar decades, using Keynesian macroeconomic policies and tight regulation of the financial system. Obviously, those policies broke down in the late 1960s and early 1970s. On the other hand, the limited resort to Keynesian methods in 2008 and 2009 did prevent complete collapse of the system.

As I argued in Zombie Economics, the most promising route forward is to redevelop Keynesian economics in a way that overcomes these failings. That’s not a strategy with a guarantee of success, but it seems more hopeful than any alternative, and certainly better than standing by and restating the obvious fact that crises are part of the system.

{ 138 comments }

1

William Timberman 06.25.11 at 4:27 pm

John, I fear that politics, defined as disagreements about who is entitled to how much under what circumstances, stand in the way of overcoming the failings at issue, especially to the degree that irrationality is, of necessity, their most prominent feature. Marx was righter than he was wrong, in other words, and even a rationally adjusted Keynesian praxis may very well turn out to be a fool’s errand.

We don’t know this, of course, but I believe that recent events entitle us to suspect it. Which leaves us with a very old dilemma on our hands. Interesting, in this context, to study the the Herrigel/Farrell thread on Manufacturing Possibilities. Bottom-up democratic ferment as a driver of adaptation and possible future stabilities seems pretty weak tea when you consider a) recent history, and b) the difficulty of managing systems which are both very complex and perilous beyond any convincing precedent in the early history of industrialization (Fukushima Daichi, anyone? Reliance on crop monocultures of genetically-engineered, patented plants which cannot replicate themselves naturally?)

Having the power of gods without their wisdom, and having to impute such salvation as we can imagine from the random magic of the masses seems a stretch to me. The top-down approaches, of course, are only superficially more promising, ond only to those who currently sit at the top. Oy!

2

bianca steele 06.25.11 at 4:34 pm

John, you’re missing the link to your book.

Obviously, those policies broke down in the late 1960s and early 1970s.

I’ve probably been asleep but I know almost nothing about this. Histories of that time I’ve seen lately are more about industrial policy and things that impact unions. Are there one or two books that would be a good place to start?

As for within the system, there was no alternative, I am very dubious about this kind of argument, which in my unhumble opinion is at times spoken in a less theoretical way by people who have idiosyncratic views about what counts as “within the system” either in terms of how things have always been done or in terms of what kinds of change don’t count as challenging the system. It helps explain why things suck while energizing various activities that have the effect of repelling anyone who might help make them suck less bad.

3

bianca steele 06.25.11 at 4:39 pm

Also, it seems to me that thinking about socialism can often be a kind of wishful thinking: Things are bad, they must change, they will change, things will become perfect, and this is what we think perfection would consist in. I’m not sure Marx went far enough in criticizing this kind of thing if he even did, though it would be a useful thing to have done. But on the other hand, the opposite of wishful thinking is not the necessity of stasis.

To the extent, also, that “Marxist thinking” was once consciousness raising for working people to get them thinking and involved, it might not be a useful kind of thinking for other purposes.

4

bob mcmanus 06.25.11 at 4:45 pm

The Busts Keep Getting Bigger Why?

Krugman & Wells NYT review of Jeff Madrick Age of Greed July 14 2011

I don’t think the collapse of capitalism necessarily guarantees the triumph of the proletariat, and I am not sure M-E thought so. Bourgeois liberals can so weaken class consciousness that revolution and socialism impossible to imagine and we devolve into barbarism, war, and neo-feudalism. Or simple feudalism. I kinda expect it, and only hope it happens after me.

Chris Hedges says to set up little Lindisfarnes to preserve progressive values after the deluge.

5

William Timberman 06.25.11 at 4:55 pm

Correction: to the random magic of the masses…

6

Sebastian H 06.25.11 at 5:21 pm

“One of the most powerful feature of Marxian analysis is the idea that crisis is a normal part of capitalism rather than an aberration resulting from exogenous shocks. Marx asserts that crises arise from inherent contradictions in the system and proposes a dialectical account by which the resolution of one crisis produces the contradictions that set the scene for the next. That seems to me to remain valuable”

I suspect the insight we should be getting is that crisis is a normal part of nearly all human systems rather than an aberration resulting from exogenous shocks. If that insight is true, it has very different implications for policy making. The goal should not to be to move from the scary system which has crises to the better system that doesn’t have crises. The goal should be to let crises shake out, but to mitigate their damage.

The analogy that makes sense to me is the old wildfire policy of the US forest service. By stamping down on every fire, they were successful NOT in avoiding a fire crisis, but rather in putting it off for decades while the fuel built. Eventually it built up so that when a fire came along that couldn’t be controlled, it was enormously more damaging and intense than the little fires that were avoided.

It seems to me, at my medium level of economic understanding, that much of the focus of the 1980s-2000s was operating under a “lets try to avoid all economic crises” mode. This appeared to be successful (the great moderation) but may have just been storing the fuel for an incredibly intense disaster later (the last few years, and if the EU doesn’t meddle through well maybe more intense yet to come). I don’t believe we can avoid the medium crises, and I suspect that by trying to do so we are creating the super-disasters.

Now I’m not at all *sure* that I’m right. But I strongly suspect that at least seriously mulling through it from that perspective might be very beneficial.

7

bert 06.25.11 at 5:25 pm

Bianca, I’m sure you know plenty about it, but perhaps haven’t looked at it through this frame. Remember that Richard Nixon ran a prices and incomes policy (and even described himself as a Keynesian after the collapse of Bretton Woods). The difference between him and the Reagan administration is the failure of Keynes-influenced approaches that John describes. If you’re looking online, “stagflation” might return some interesting results.

John, I think there’s openness to reform still.
The Chileans have no interest in a bolivarian sonderweg. But they imposed capital controls to discourage hot money, and were spared the worst of the late 90s upheavals in Latin America. Likewise, todays Tories are Thatcher’s children, yet George Osborne is now proposing a separation of banking along Glass-Steagall lines.
Since the crisis, capital’s spokesmen have argued that any imposition of costs on their business risks further crisis. It’s an argument that Angela Merkel, for one, seems to have responded to. But they have an argument of longer standing, based on their consistent practice of regulatory arbitrage: regulate us, and we move to Macau.
To get round this obstacle, international cooperation is needed.
So comrades, come rally ….

8

dictateursanguinaire 06.25.11 at 5:29 pm

JQ I agree with you on the idea of an inherent crisis setup and it seems to have originated (at least in its most powerful and influential form) with Marx – but also, didn’t Keynes and Minsky, among others, basically absorb that? At the very least, there are some Marx-ian folks who are definitely not orthodox Marx-ists who talk about that, it seems like.

Also, I am not an economist and you identify as a Keynesian so I’m probably out of line here but: what do you make of the argument (often deployed by Marxists, incidentally) that the “failure” of Keynesian policy in the Western World had more to do with external events (opening of various markets [I know China’s opening was a little later but there were some other peripheral countries opening up, no?] being a major one) than the effects of the policies themselves? Or sort of the labor aristocracy thing? I see it more as that Keynesian policy is really not workable in a globalized world because the political muscle needed requires intense mass action and the only reason it worked in the “Golden Age” is the mass mobilization memories from the GD + post WWII prosperity + political muscle + limited labor arbitrage opportunities, none of which currently exist anymore.

I guess my personal dilemma is that I agree with the cynical Marxist analysis re: Keynes but I am no Marxist apologist and if Keynesianism really doesn’t work and it’s either a global resistance movement and the neoliberal just-wait-til-growth-makes-it-all-better plan, i have to go with the latter just based on history. What are your thoughts? Doesn’t Dani Rodrik talk about this? I probably should read him I spose.

9

dictateursanguinaire 06.25.11 at 5:30 pm

* […] OR the neoliberal […]

10

Chris Bertram 06.25.11 at 5:34 pm

I think we have to add a further important factor into the present mix: the ecological crisis. Classical Marxism foresaw a future of material abundance and human dominance over nature. Abundance in that sense isn’t going to happen, and the ecological free lunch is over. AFAICS that spells disaster for the social democratic strategy of going for growth and increased consumption and seeking a compromise where the ruling class stays wealthy but everyone gets looked after in the end . That’s not going to work, matters look much more zero sum, and we can already see that the main political parties (certainly in Britain and the US) have now abandoned any aspiration (not commitment!) to ending mass poverty.

11

StevenAttewell 06.25.11 at 6:14 pm

Bianca – I highly recommend Judith Stein’s Pivotal Decade, William Greider’s Secrets of the Temple, and Jefferson Cowie’s Staying Alive.

Regarding the OP, I agree, although I’m a little biased on this issue. Not only does the standard Marxist approach create a dangerous tendency to orthodox economics that set back the cause of socialism by decades in Britain, France, and Germany, but it also leads to a rather passive revolutionary strategy that counts on inevitability over actually thinking through what a revolution would require.

12

Henri Vieuxtemps 06.25.11 at 6:22 pm

Produce for use, not for profit. Profit-based economy is trickery; hoping to fool the gods. Gods are vindictive bastards.

13

ejh 06.25.11 at 6:22 pm

Chris Hedges says to set up little Lindisfarnes to preserve progressive values after the deluge.

Like the end of Fahrenheit 451?

I’m up for that.

14

bianca steele 06.25.11 at 7:34 pm

bert @ 7: Remember

Believe it or not, it didn’t come up much in first grade current events.

15

bianca steele 06.25.11 at 7:36 pm

As for “stagflation,” our seventh grade science teacher’s one lesson about economics involved why when the steelworkers get a raise, the price of Eagles’ tickets go up.

16

philofra 06.25.11 at 7:40 pm

Modern societies can no longer afford revolutions like in the past. Revolutions (including wars) were too upending and destructive.

Nevertheless, society needs agitation and mini revolutions to keep it from stagnating and atrophying. Capitalism, with its contradictions and crises that it now and then throws our way, fills that ticket.

17

bert 06.25.11 at 7:53 pm

Got it, Bianca.
The standard narrative is, it was the long, peanut-farming national nightmare that preceded Morning in America.
In my country, it was the pandimensional screwup of the Winter of Discontent. (Shakespeare allusions. There’s posh.)

In both, by the way, there was a pretty big OPEC-related exogenous shock.

18

John Quiggin 06.25.11 at 8:22 pm

I don’t agree that the OPEC shock was exogenous – it was part of a general upsurge in commodity prices under way well before 1973. I talk a bit more about this in Zombie Econ

19

J. Otto Pohl 06.25.11 at 8:54 pm

How is the raise in oil prices for petroleum importing countries not exogenous? Even if it is part of a general rise in commodity prices, the reduction in oil production by Saudi Arabia and other OPEC members, the increase in oil prices and the hardship for importing nations is pretty clearly connected. Countries like Ghana had no influence over the price of imported oil and it had a devastating effect on them. Absent the oil shock things would have been a lot better for these countries since money spent on the increased price of oil and its knock on effects could have been used elsewhere. This seems to me to clearly be an exogenous shock.

In contrast there were states that might have economically collapsed in the 1970s without high oil prices. The most notable was the USSR. One of the underlying reasons for the Soviet collapse in 1991 was the decline in oil prices in the 1980s which deprived Moscow of the means of affording both guns and butter. Under Brezhnev economic problems could be papered over with oil money to a large extent, something they could not do so easily by the time Gorbachev came to power. The high oil prices allowed the Soviet government to avoid making any serious economic reforms to an increasingly sclerotic system during this time.

20

ejh 06.25.11 at 8:55 pm

As for “stagflation,” our seventh grade science teacher’s one lesson about economics involved why when the steelworkers get a raise, the price of Eagles’ tickets go up.

When they don’t, do the ticket prices stay as they are?

21

The Raven 06.25.11 at 8:59 pm

I wrote something about this, for Delong’s blog comments, a while back in the context of Marxism and Keynesianism.

Is it not possible to regard Marx as an important and useful historical theorist or philosopher, without insisting that he was entirely right or entirely wrong? A forerunner of a still-emerging social science, in the way that, perhaps, Copernicus was a forerunner of what has since become physics? The Copernican system still used perfect circles and epicycles; it was not particularly useful for computation. But by putting the Sun at the center, Copernicus made it possible for Kepler and then Newton to do their work. Marx put system at the center of economics, rather than the wealthy or powerful, and paved the way for thinking about economics without defining economics in terms of central figures or groups. Which might put Keynes in the position of Kepler or Newton. And, as with physics, economics advances, one tombstone at a time. It is only 65 years since Keynes death; only a few more years since his major works were published. That is not so very long for a revolution in thought.

I think I agree with you that the way forward is the extension of Kenysian economics. I also think there are are more insights, down the road. If Keynes, perhaps, falls into the place of Kepler in this intellectual history, perhaps there will be a Newton.

Social forms that are prone to repeated failures are not likely to survive in competition with social forms that are capable of sustained progress. The sustained prosperity that Keynesian economics made possible was a huge part of the victory in the Cold War. So, if the on-going crises do not simply smash humanity back to an impoverished world, I suppose the successful societies of the future will be those that adopt the models derived from Keynesianism, and its yet-unknown successor. The successful global society, I guess, since the world is now unified.

22

bert 06.25.11 at 9:03 pm

#18, #19: It was endogenous to the planet.

23

bianca steele 06.25.11 at 9:15 pm

@20
Obviously, this being the era of stagflation, prices always go up. It had nothing to do with supply and demand of tickets btw (and if there was any kind of joke involving the Steelers I didn’t get it). It had to do with Ron Jaworski’s need to buy a new car every year. OPEC may have come into it but I’m pretty sure the underlying cause was the steelworkers upstate asking for higher wages. (Was there a veiled reference to the PFT? I don’t remember.)

24

John Quiggin 06.25.11 at 9:49 pm

More specifically, the oil shock was endogenous to the US and other developed countries, since it was a reflection of the broader stagflation that was already underway. Of course, the whole crisis, including the rise in oil prices, was an exogenous shock to poor countries like Ghana.

25

bert 06.25.11 at 10:09 pm

Let’s call it a difference of interpretation. I thought I’d read all your Zombie posts, but it seems I may have missed that one. You won’t want to repeat yourself, and it’s a digression from your original post, for which my apologies – if you have a link, it sounds interesting.

26

John Quiggin 06.25.11 at 10:14 pm

27

Louis Proyect 06.25.11 at 10:49 pm

The revisionist Swedish Social Democrats weren’t so constrained and produced a response that was social democratic in the modern sense of the term.

I would recommend that people get their hands on “Adalen ’31” if at all possible (unfortunately quite a daunting task.) This Swedish film depicts the bloody confrontation between miners and bosses that led to a general strike and the onset of the first Social Democratic government. One thing that seems lost on Timberites is the way in which Keynesianism was inaugurated in the 1930s and onwards. It was the last resort of a desperate ruling class that saw the handwriting on the wall. That is why it is not in fashion nowadays. There is no USSR. Of course, the continuing assault on the working class will lead to future battles down the road that will have much more of an affinity with Lenin than Keynes. Just look at Greece to see the future of all of Europe, the USA and Japan.

28

bert 06.25.11 at 10:58 pm

I see.
You object to the deployment of the oil shock as an absolving excuse for deeper, preexisting weaknesses.
Is that fair? If so, no disagreement here.

29

bert 06.25.11 at 11:02 pm

There was a Greek communist on Newsnight the other night, Louis.
She sounded like a nationalist.
Perhaps they’d just picked the wrong faction.

30

John Quiggin 06.25.11 at 11:10 pm

Responding to Louis P, and to the earlier thread, there is, I think, a difference in national perspective. In Australia and New Zealand, the situation was far more favorable to labor than elsewhere. We got the eight hour day in the mid-19th century. Labor was politically successful very early (particularly in Oz, where we had a Labor govt as early as, from memory, 1904) and despite all kinds of splits and vicissitudes, particularly during the Depression, we got the Keynesian social-democratic welfare state as a result of ordinary parliamentary politics, with the rejection of conservative parties seen as having failed to manage the Depression. That’s obviously very different from what happened in Europe and different also from the US, where the New Deal only went halfway.

31

John Quiggin 06.25.11 at 11:11 pm

Bert @28. Agreed on that

32

Martin Bento 06.25.11 at 11:12 pm

Late in 73, many of the major oil exporters of the world cut off their exports. This caused supply in importing countries to steeply fall. Demand for oil is empirically highly inelastic in the short to medium term. By the most basic principles of supply and demand, the oil cutoff had to result in higher prices, and, indeed, higher prices emerged. The motive for the oil cutoff was to punish the West for its support of Israel in the 73 war, which would be exogenous to any economic factor. Even if commodity prices were rising anyway, indeed, even if they were rising on the same curve and magnitude as oil during this period, which I doubt, all you can say is that oil prices must have fallen otherwise, because the supply shock was real, and if you subtract supply and demand from the standard economic analysis of the market, what is left? If you believe in supply and demand, there was an exogenous oil shock to the system.

I suppose one could try to finesse this by sticking in a “significantly”, but it won’t stick. The supply drop was clearly significant. To argue for no significant exogenous cause, one has to argue that a sudden, unexpected large drop in supply had no significant effect. It is difficult to see even how this could be so, much less how it is so.

33

Watson Ladd 06.26.11 at 2:23 am

The crisis is not economic in Marx. 1914 in Germany is considered to be a crisis because the SDP splits on the War Credits question, even as the economy is good. What really makes bourgeois society a crisis is our awareness that our social relations have dramatically transformed, and that we could possibly transform them even further. Yet this has to be opposed to the condition of unfreedom in which capitalism transforms itself.

The German SDP was reluctant to act because of Karl Kautsky treating the party as a submarine that would sink below the storm threatening Germany, only to emerge above the surface once it passed. This ideology was opposed to Luxembourg’s, which held that the party would heighten the crisis: by voting against the War Credits, the party would bring down the state itself. Furthermore, Marx’s supposed economic mechanism for crisis is broken, since the declining rate of profit doesn’t happen. His political mechanism of the workers creating the crisis or heightening the crisis is sound.

Of course, there is the whole question of the contradictions of capital. Marx always insists that the contradictions are in the way bourgeois social life is divided, that the transformations ones mode of life undergoes are created absent ones conscious direction of them, etc. etc. The economic instability of capital is nothing compared to the risk of a slide into barbarism. 25 million people died in war in Europe this past century, and I guessed low. Its not “socialism or capitalist instability” but rather “socialism or barbarism”. Our world will remain capitalist, becoming more and more brutal and unfeeling unless something is done to halt it.

34

Tony Lynch 06.26.11 at 2:36 am

I expect this is half-baked, but still…

May I modestly suggest that crises are endogenous to capitalism, but that some crises can be worse than others because the relevant elites are worse than before (where “worse” means more concerned with the ends of domination and acquisition)?

I know this is old hat (which is not to say, better for that), but here is the addition:

During the Keynesian Era it was not simply competition between systems (Capitalist/Socialist) that did the trick for our elites (meaning them able to perceive through the glass darkly the common or public interest and act, even if as little as possible, on it) but the fact that many of them believed that we had developed 3 institutions that manged to do this without needing any special virtue from anyone, them included – so”, economically, the “free market”, politically the “separation of powers”between legislative, executive and judiciary, and electorally, “representative democracy”.

Now, what happens when this threefold faith is lost? And what happens, most especially, when it is lost to our elites?

I say that what happens is that predation becomes the natural political, economic form. As there is no magic of institutions to turn self-interest into the common good, there is no common good at all, there is only domination and acquisition. (Of course, it helps if the prey are fed the usual 3 institution rubbish (and ill-educated and frightened…)

35

StevenAttewell 06.26.11 at 3:19 am

Louis Proyect at 27-

Did you mean to say that “One thing that seems lost on Timberites is the way in which Keynesianism was inaugurated in the 1930s and onwards. It was the last resort of a desperate ruling class that saw the handwriting on the wall.”? Because your Swedish example would undercut that; Social Democrats took the state on a promise of Keynesianism (among other things) over the objection of the ruling class. Likewise, the introduction of Keynesianism in Britain in 1945 and other cases where Keynesianism followed the flag of democratic socialism.

36

Nick Bradley 06.26.11 at 3:30 am

It’s no wonder you guys are failures.

Nearly all the early (19th Century) anarchists and communists recognized that rent is extracted from the worker primarily through (4) methods:

1. land rights
2. tariffs
3. central banking
4. intellectual property

Now, illegitimate land rights obtained through force (e.g. latifundia) aren’t really a factor in today’s advanced economy — but still is an issue in the third world. And tariffs have pretty much been eliminated, which is a victory for worker purchasing power. There’s a fifth today, and that is restrictions on labor movement, but it didn’t really exist in the 19th Century.

So that leaves Central Banking and Intellectual property. Central Banking is the primary method in which the financial sector loots the other classes. In the absence of centralized fractional reserve banking ( in a hard money deflationary system), wealth accrues to those at the bottom — the worker’s individual savings and frugality.

If you eliminate intellectual property, workers can build anything they want, and their purchasing power goes up due to a drop in prices.

All of you espousing Keynesianism are fools — the Keynesian system merely PROPS UP these privileges with MORE centralized banking, MORE political handouts, and STRONGER intellectual property.

So any real Marxist should be striving to smash central banking, intellectual property, labor mobility restrictions, and what are left of Tariffs. That is what will free the multitude…

basically any real Marxist should take the mutual plunge and synthesize Austrian economics and Marxist class theory. Any and all who support Keynesian policies are propping up privilege.

37

Sandwichman 06.26.11 at 3:43 am

Ah, t’ heck with all this nattering. Let’s just get out there and overthrow something for crying out loud.

38

Myles 06.26.11 at 3:52 am

I think we have to add a further important factor into the present mix: the ecological crisis. Classical Marxism foresaw a future of material abundance and human dominance over nature. Abundance in that sense isn’t going to happen, and the ecological free lunch is over. AFAICS that spells disaster for the social democratic strategy of going for growth and increased consumption and seeking a compromise where the ruling class stays wealthy but everyone gets looked after in the end . That’s not going to work, matters look much more zero sum, and we can already see that the main political parties (certainly in Britain and the US) have now abandoned any aspiration (not commitment!) to ending mass poverty.

I think the two (the ecological question and the current policies of U.S. and British parties) are separate questions, and better be addressed thus. In regard to the ecology, I seriously doubt that absent a catastrophic warming of the planet (if we do nothing) that there will be genuinely be a crisis of material shortages. Basically speaking, human beings are remarkably efficient and ingenious at making more out of less. Britain cut off the supply of rubber to Germany in the Great War, and Germany made synthetic rubber. Fuel became more expensive, and cars started being made that were much more fuel-efficient; presumably at some future point hybrids will become widespread, and the price of hybrids will come down as production moves to the lowest-cost point on the long-term curve. Just take the computer, for example: the computer of today weighs less than most typewriters. TV’s today take much less in terms of raw materials than the old cathode-ray tube ones.

With regard to the political question, I think the problem is that it was never quite possible to comprehensively solve poverty on a scale such as the United States, which is basically a continent. It’s just too big. It would be as if the EU parliament declared that they are going to solve poverty in the furthest corners of Portugal and Greece. Well, not going to happen, is it? Not least because the Portuguese and the Greeks don’t much like you interfering (same with some U.S. states). With regard to Britain, it has some genuine, material relation to the regional aspect. If it were just southern England, there would be no problem and probably even the Tory Party would promise to resolve it, but once you add in the de-industrialized areas then the problem become monumental and entrenched. (Imagine if they were actually to promise to solve poverty: so, what are you going to do about all the areas with 20% unemployment? Provide government jobs? Errrr……no answer. In situations like this, the natural economic outcome is regional economic migration, but that’s not acceptable as government policy.) A country the size of Luxembourg, on the other hand, would always try to solve its own poverty problems.

39

Myles 06.26.11 at 3:59 am

(Revised: I don’t mean that ending mass poverty in the U.S. is impossible or undesirable; indeed I believe the reverse, but I think more has to be done at the state level, and state governments have to take greater initiatives in resolving the poverty problems in their respective states, which after all is a state responsibility, the provision for the welfare of its citizens.)

40

imajoebob 06.26.11 at 4:43 am

An obtuse and oversimplified argument would be that Monetarism not only “saved” Keynesian economics, but actually strengthened it. As oxymoronic as it may sound, Monetarism is the “Social Safety Net” for the Keynesians.

Government monetary policies have become a buffer for the worst effects of Keynesian policies. The central banks have become the parents to a bunch of 17-year old market joy riders. They cover their insurance, their gas, and even their speeding tickets. The only consequence for these adolescent gamblers is that they’re only half as rich as they were at the peak. After the crash Mum and Dad even went out and bought them a new car (to wreck again). Almost all the worst principals in the recent crash still ended up better than they were 10 years ago.

These private sector zealots have found a way to terrorize enough of the population – especially enough members of the political class – that their failure will start a chain reaction that will cause everyone to fail. So, despite their “philosophical differences,” they “allow” politicians pass regulations to protect “us” from them. Except all they really do is protect “them” for failure. “Us” can’t be protected from them, because that’s a “Nanny State” and socialism and communism and ant-capitalist and will be the end of democracy. And the idiot politicians fall for it – either the philosophical free-market argument or the economic circuit breakers – every damn time (just ask Elizabeth Warren).

The real reason there is little threat of a Marxist revolution is that Capitalism is dead. We now live under a Collectivist Oligarchy, where the risk is covered by everyone at the bottom and the reward all goes to those at the top. The Oligarchs leave just enough crumbs and just enough threat to take away those crumbs to keep the majority of the bottom toeing their line.

Is there a better example than Greece? It’s been obvious that those at the top – Germany, France, Italy, and even Britain, are testing the Greeks to see how far they can be pushed. They know that if the Greek economy fails, it will take the Irish and Spaniards with them, which will then kill the strong countries’ economies for the next 5 to 10 years. Once it appears they are pushing Greece over that edge they will pull back, “conceding” to the will of the Greek people. The bourgeois will revel in their “victory” over the central banks, oblivious that their victory was giving up everything they gained the last 20 years instead of 30. Except the rich, who will end up richer.

Then they’ll convince the proletariat that “The good news is you only got shot once!”

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william u. 06.26.11 at 4:44 am

‘In the absence of centralized fractional reserve banking ( in a hard money deflationary system), wealth accrues to those at the bottom—the worker’s individual savings and frugality.’

Er, deflation benefits rentier interests and read pummels debtors (i.e. farmers and workers.) Read Polanyi and Eichengreen, or the Shorter P&E provided by Shalizi:
http://www.cscs.umich.edu/~crshalizi/reviews/globalizing-capital/

42

sg 06.26.11 at 4:59 am

In regard to the ecology, I seriously doubt that absent a catastrophic warming of the planet (if we do nothing) that there will be genuinely be a crisis of material shortages

Tell that to the fishes, Myles. And ask yourself why you’re confusing raw materials with ecological services, while you’re at it.

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Chris Bertram 06.26.11 at 8:23 am

Yes Myles, what an absurd idea, that in the wealthiest countries in the world, politicians might continue to aspire to ending poverty among their citizens! The very thought of it – ridiculous!

44

Guido Nius 06.26.11 at 11:04 am

Why don’t we switch to the “No true Keynesianism”-fallacy. If we use in parallel the “No true communism”- and “No true liberalism”-fallacies we might summarize most internet discussions on politics and economics in a maximum of 3 replies.

But to JQ’s point, Keynesianists, and Krugman in particular, were wrong. It’s more than a bit ridiculous that those who advocated a uniform supply-side solution are now attacking ferociously the uniform monetary solution that Europe is trying to hold onto to avoid the issues of competing devaluations that risked making Europe unstable during the 70s. At its worst Keynesianism is tinkering for tinkering’s sake. At its best, Keynesianism is the realization that there are no solutions except ad hoc solutions with a lot of tinkering inside.

The point is where you want to go. Anything that makes the way to go there prominent to the extent of making the end result almost co-incidental is, well, not nice.

45

Hidari 06.26.11 at 11:23 am

‘I think we have to add a further important factor into the present mix: the ecological crisis. Classical Marxism foresaw a future of material abundance and human dominance over nature. Abundance in that sense isn’t going to happen, and the ecological free lunch is over. ‘

Whatever ‘classical Marxism’ might mean (presumably it means the so to speak ‘primitive’ form of Marxism that developed before the primary texts were available or translated) Marx himself thought no such thing. To quote Foster: ‘ Marx and Engels did not stop with the soil nutrient cycle, or the town-country relation. They addressed at various points in their work such issues as deforestation, desertification, climate change, the elimination of deer from the forests, the commodification of species, pollution, industrial wastes, toxic contamination, recycling, the exhaustion of coal mines, disease, overpopulation and the evolution (and co-evolution) of species.’

The fact that our ‘unrestrained’ capitalism would seem to be inevitably leading to a gigantic ecological collapse unparalleled in human history would not have surprised them. (http://pubs.socialistreviewindex.org.uk/isj96/foster.htm)

Incidentally any ‘genuine’ Marxist can criticise me about this but:

‘On the other hand, the central point of Marx’s theory of crisis was the claim that crises would grow steadily more intense, driven by the declining rate of profit, until they brought about the revolutionary overthrow of the system’.

Is this true? It’s certainly true that Marx thought this was a general trend, ceteris paribus, but once you have added the Latin phrase you have added a very great deal. According to Francis Wheen in his little book on Capital (and I would be grateful if someone who knew more about Marx than me could confirm whether or not this was true) in Volume 3 of Capital a version of capitalism that could continue indefinitely is briefly sketched out.

Marx’s point, surely is more general. Capitalism, is a machine. Sure when a piece breaks you can ‘patch it up’. But then another piece breaks. You buy a replacement for that too, but then it’s incompatible with the old piece and so then a third piece breaks down and then you need a new kind of fuel which you can’t arrange to get so you have to overhaul the machine while it’s running but this means getting more machinery which is more incompatible with the other bits and pieces…..

So you can keep the machine going more or less indefinitely…. as it becomes more and more inefficient and costly…. at the price of all your natural resources, and your time and your sanity.

But at what point do you just go ‘screw this’ and admit the machine is old and broken and past it and buy a new one?

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John Quiggin 06.26.11 at 12:53 pm

Guido, if you have a point, you haven’t made it, at least not to me. Are you saying that Keynesians are supply-siders?

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Nick Bradley 06.26.11 at 1:52 pm

@william u –

You’re thoroughly confused and probably didn’t read your own link. The paper was a discussion of Central Bank manipulation of the money supply — changing reserve requirements, bimetalism, etc.

In the absence of a central bank and fractional reserve banking, you would have gentle year over year price deflation — not monetary deflation.

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heckblazer 06.26.11 at 3:02 pm

“In the absence of a central bank and fractional reserve banking, you would have gentle year over year price deflation—not monetary deflation.”

Eliminating fractional reserve banking certainly is, um, a revolutionary idea. I’m not sure I can picture a modern industrial economy in which financial institutions have a liquidity ratio of 100%, though that may be lack of imagination on my part.

If I’m mistaken you’re merely calling for the elimination of central banks specifically and not fractional reserves in general you’re just setting things up for lots of bank runs and financial chaos. That certainly was the experience of the United States during the “free banking”period after Andrew Jackson killed the second Bank of the United States. That such an environment sucks for the little guy is probably why central banking is one of the demands in the Communist Manifesto.

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Chris Bertram 06.26.11 at 3:11 pm

Hidari. I’ll leave you to say whether the untranslated texts that Marx chose not to publish are more sophisticated and more representative of his considered views than the ones that he did. The kind of ideas I had in mind were, for example, those expressed by Trotsky in the final chapter of _Literature and Revolution_ . For example,

bq. The wall will fall not only between art and industry, but simultaneously between art and nature also. This is not meant in the sense of Jean-Jacques Rousseau, that art will come nearer to a state of nature, but that nature will become more “artificial”. The present distribution of mountains and rivers, of fields, of meadows, of steppes, of forests, and of seashores, cannot be considered final. Man has already made changes in the map of nature that are not few nor insignificant. But they are mere pupils’ practice in comparison with what is coming. Faith merely promises to move mountains; but technology, which takes nothing “on faith”, is actually able to cut down mountains and move them. Up to now this was done for industrial purposes (mines) or for railways (tunnels); in the future this will be done on an immeasurably larger scale, according to a general industrial and artistic plan. Man will occupy himself with re-registering mountains and rivers, and will earnestly and repeatedly make improvements in nature. In the end, he will have rebuilt the earth, if not in his own image, at least according to his own taste.

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StevenAttewell 06.26.11 at 3:36 pm

Nick Bradley -

I really wish more Austrians would read history. Prior to central banking, there wasn’t some worker’s paradise – wealth accrues to those who already have it in a deflationary period, and since workers were poorly paid and creditors to boot, deflation was immensely regressive.

There’s a reason that the 19th century American left were massively in favor of inflation and a democratically-controlled central bank – the powers that be in the 19th century wanted deflation, especially the financial powers. Look at the history of Gold Bugs in American political parties – Wall Street financiers practically to a man.

Myles – poverty in the U.S can be easily eliminated with our current resources; geographic size isn’t a barrier, but rather an asset – costs are spread out rather than concentrated. The idea that decentralization makes it easier to fight poverty is simply ahistorical – state and local governments lack the resources, they run into collective action problems, and they are more easily captured by elites who directly benefit from the existence of poverty.

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Myles 06.26.11 at 3:42 pm

Yes Myles, what an absurd idea, that in the wealthiest countries in the world, politicians might continue to aspire to ending poverty among their citizens! The very thought of it – ridiculous!

Well, a) the U.S. and U.K. are hardly the wealthiest countries in the world. Switzerland, Norway, Luxembourg, Denmark, Sweden, etc. are. And b) my very point was that the U.S. should not be considered on a national, but rather a continental scale. And on a continental level, there are always going to be greater divergences than within a smaller entity. And c) It’s certainly easy to propose to do something, but what would you propose to do about de-industrialized areas (which form a heavy part of the poverty problem in the U.K.) that would actually work? It’s not as if “something must be done, this is something, let’s do it” actually works.

Some problems don’t have active solutions. The natural response to poverty is population movement; there might be natural factors and changes in endowments, or at least changes beyond political control, which makes one area more suitable for expanded economic activity over others. There’s, for example, no active solution to the economic decline of Michigan and Maine, but the poverty problems in Michigan and (especially) Maine are heavily dependent on their general economic problems. If the economic blight (and poverty) afflicting certain parts of the U.K. is anything like that in Michigan, I don’t see how any long-term solution could be successful which does not make it easier for people to just leave. Government could and definitely should work on the amelioration of the horrible effects of poverty by increasing welfare levels, but the actual poverty problem, the poverty’s existence in the first place, are much more intractable to “end”.

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Guido Nius 06.26.11 at 4:40 pm

Well, darn, JQ, I shouldn’t have put supply side in there. My bad. Jargon is always easy to focus on.

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hartal 06.26.11 at 5:21 pm

“Marx asserts that crises arise from inherent contradictions in the system and proposes a dialectical account by which the resolution of one crisis produces the contradictions that set the scene for the next. That seems to me to remain valuable.”
This is to conflate the empty phrase mongering of Marx’s epigones with the serious theoretical account of those contradictions as developed by Rudolf Hilferding (see his analysis of disproportionalities in reproduction), Paul Sweezy (see his analysis of the contradictions in distribution) and, above all, Henryk Grossmann (see the review of their theoretical contributions in Paul Mattick Economic Crisis and Crisis Theory).
There is also no doubt that the fundamental weaknesses of classical Marxian crisis theory are its neglect of credit relations (see Minsky) and of stabilization policy especially in the context of differences in state capabilities in a hierarchical world system (think here of course of the IMF mandated responses to the Asia Financial Panic as opposed to the US government response to the 2008 crisis).

But what happens when crises are not overcome even after the credit mechanism has been repaired and stabilization policy has been attempted to the extent possible within the framework of bourgeois electoral democracy (only war enabled the radical institutional change required to overcome the Great Depression)?

The Marxist position has not been ideological opposition to stabilization policy but rather that it will prove, in conditions of protracted crisis, to be politically impossible on the scale required (business will oppose such an expansive state on principled grounds) and ineffective or counterproductive (pushing on a string, ultra low rates will not stimulate investment and export bubbles; huge debt-financed government expenditures will spook private investors with fears of higher future taxation even as the marginal efficiency of capital remains depressed and the multiplier will thus prove to be very low ).

However, there are specific conditions under which state stabilization policy could be effective. An inflationary policy could lead to an increase in net exports (of course at the cost of exacerbating crisis elsewhere) and increase in the rate of exploitation. This could lead to a revival of accumulation for some but not an increase in the fortunes for all (Stiglitz has sounded the alarm against competitive devaluation as the main de facto policy response).

Of course Marxist have never thought state policy could not overcome a crisis. After all, this is exactly what the Marxist theory of imperialism claims. However, US failure in Iraq to establish there and throughout West Asia a zone for the profitable export of capital not only deprives US capitalism of its major renewal strategy but also has left it with massive debt (see Stiglitz and Bilmes) that limits the room for maneuver in many ways

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Hidari 06.26.11 at 5:50 pm

Well Trotsky also believed in eugenics.

Are we going to blame that on Marx as well?

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hartal 06.26.11 at 5:59 pm

Trotsky may well have believed in eugenics, but what he meant by eugenics is not at all clear to me. Subsidies for child-rearing? My bet is that Trotsky is responding not to the burden of the subnormals as Schumpeter called them but to declining birth rates. Subsidies for child rearing could be considered eugenics too. I don’t see any evidence that he supported the sterilization of the unfit that the Americans taught to the Germans (see Stefan Kuehl; of course the whole racist eugenic policy was based on an often conscious abuse of science). There is also the question of whether we should oppose genetic screening of fetuses. There is a book, I believe, by Cowen, Heredity and Hope. That too makes an argument for a kind of eugenics. So does Jonathan Glover in a way.

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Nick Bradley 06.26.11 at 6:32 pm

@StevenAttewell –

Obviously it wasn’t some workers paradise due to other factors. But without Central Banking the financial sector cannot extract massive rents — it’s that simple.

In addition, under central banking, those with ACCESS to credit benefit the most. Who do you suppose those persons are? Under hard money free banking, we’d have a lot more credit unions where workers provide their own credit.

the Left supported a central bank due to a misunderstanding of the business cycle and the money supply’s role in it. And it’s not so much an issue of inflation vs. deflation, but the cyclical process that fractional reserve banking causes that destroys the worst off and enriches the best off.

All the major financiers pushed for a central bank in the United States, and they all rallied behind the Bank of England to secure their credit lines and profit margins in the 19th Century.

You have failed to address my point that in today’s age, the financial sector is extracting a ton from society without adding anything back. And those activities are all enabled by central bank fractional reserve banking.

*I will add that hard money free banking is only one path to end the money monopoly. The other is the one proposed by Dennis Kucinich and other that calls for the establishment of a 100% reserve standard, with all new dollars being created by the treasury and being distributed to citizens. In the current fractional reserve system the $600bn we create every year first goes to the banks, then to big corporations, then to smaller corporations, then to workers. In this “real dollars” system, the $600bn would be distributed through $2,000 checks to each American every year. The inflation rate wouldn’t change, but income inequality would go down and the financial services sector would contract.

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Hidari 06.26.11 at 6:33 pm

Before we get onto a long and pointless discussion about Trotsky and eugenics…. my point is simply:

Trotsky.

Marx.

Two separate people.

And that really is all I am saying.

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Jona 06.26.11 at 8:39 pm

Louis Proyect #27: it is on the contrary easy to find. Google “Adalen 31 tpb”. Second link goes to an active torrent. Enjoy!

As for the topics in the original post, I won’t go into the fray since a fray is no way to carry the day with regard to this thorny topic. There’s not going to come anything productive from a context where comments reeking of machismo and unconstructive approaches to philosophical discussion (e.g. “It’s no wonder you guys are failures” – interesting way to strike up conversation!) are left standing. Most threads on CT seem to suffer from the same defects. If you moderate away 50% of the comments then the discussion might actually start going somewhere.

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John Quiggin 06.26.11 at 9:20 pm

@hartal, As I mentioned in the post, Hilferding’s theoretical analysis led him disastrously wrong in practice, so an appeal to his authority doesn’t get far with me. If he had something valuable to say that I’ve missed, maybe you could describe it a bit and explain what went wrong when it was put to the test.

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Chris E 06.26.11 at 9:26 pm

This is possibly an over-simplistic question; but to what extent were the various social democratic moves in the first part of the 20th century made possible by the solidarity bred by a generation going to war together, mass industrialisation or a combination of the two.

Is it really possible that we can replicate these sorts of things in exactly the same way? As someone pointed out in a previous thread, self-interest mostly trumps solidarity. So crisis on its own is never sufficient.

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Martin Bento 06.26.11 at 9:58 pm

Nick, in the late 19th century, you had a gold standard and no central bank, but you still had fractional reserve banking (FRB). That’s why bank runs led to bank failures. All that is necessary for fractional reserve banking in such a system is a public that will accept banknotes that are fractionally backed; since no others were or will be on offer, these are accepted. Where the government gets involved is in creating a legal accounting and credit system that treats bank debts legally as money for accounting purposes, which is the only purpose that matters in a credit economy, at least until a liquidity crisis occurs (at which point, the banks are bailed out), and in issuing new currency through the banks. In other words, people accept fractionally-backed bank notes on faith, and, if that faith fails, so does the note. What central banking does is legalize all this, meaning not just make it legal (it was always legal), but make it an official part of how the monetary system works and back it up with the power and credit of the government. There is a serious problem with this in that it amounts to the government’s credit backing up a license to print money given to a private for-profit actor. And because the Fed does not routinely monetize government debt, save as a temporary measure, the financial industry is given all the new money entered into the system to convert into debt. There is a legitimate complaint about FRB as practiced unfairly and dangerously privileging the financial sector, but it is not solved by a gold standard nor by the lack of a central bank, both of which do create other problems.

And ‘flation, in or de, matters enormously, specifically in the conflict of interest between creditors and debtors, which means generally, between the financial industry and everyone else. Creditors, such as bankers, have an interest in deflation as it increases the real value of the debts they hold over and above nominal interest. Under the gold standard, deflation they got, which is why they defended that standard so bitterly, not only against fiat currencies (as advocated by many populists, such as Greenbackers), but even against a return to the silver standard (the early 19th century standard) or both (bimetalism). Silver was being mined more quickly, so would have been less deflationary or even mildly inflationary (at least until the Mexican silver-mining areas like Zacatecas and Guanajuato started to get tapped out, but the bankers did not necessarily foresee that or have their horizons set so long. A silver standard would have been good news for Mexico). This is a very important point regarding whose interest is served by inflation: under any economic model, inflation moves wealth from creditors to debtors, and deflation does the reverse.

Now the Kucinich plan does get at the issue with FRB: the license to print money (which existed even more literally in the days of gold standard private banknotes), and substitute the alternative: money printing by Uncle Sam, but, seriously, how is this supposed to work? First of all, can one run a modern bank on this basis? 100% reserves? So that bank is to accept deposits and just sit on them? What kind of business is that? Moving all monetary expansion to monetization of federal debt would have to involve nationalizing the banks, as they would no longer be viable commercial entities. There are arguments for this, but the Big Brother considerations are real, at least for me, and I do believe the private sector *sometimes* can find better uses for the money than the government. I am for monetizing some government debt and also letting banks have some multiplier effects. The question of whether that money could be put to more beneficial use by being spent by the government or invested by the private sector should be approached empirically, but I would say that speculative bubbles, as measured by P/E ratios well above the normal range for, let’s say, a year or more, in any major class of assets, are prima facie evidence that there is too much investment capital at that moment, and the money is just driving up the prices of assets, rather than finding productive use, so that it could well be better for the government to allocate that money (to chant the economist’s abracadabra, “other things equal” of course).

Finally “illegitimate land rights obtained through force”. Uh, as opposed to what other way? Are not all land rights ultimately based on the ability of one group of people to claim a territory and exclude all others actually or potentially by force? Even if one wants to hold an “original settler” standard (which automatically delegitimizes almost all landholdings in the Western Hemisphere and much of the Eastern, as those would belong to the indigenous populations), if your claim to the territory is just based on the fact that no one else wants it, it vanishes as soon as someone else does, which brings you right back to force.

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StevenAttewell 06.26.11 at 10:25 pm

Nick Bradley at 56-

“without Central Banking the financial sector cannot extract massive rents—.”

Of course they can. J.P Morgan for most of his career didn’t have access to financial bargain, and it didn’t stop him from not merely extracting rents, but reshaping entire industries.

Under hard money free banking, we’d have a lot more credit unions where workers provide their own credit.

the Left supported a central bank due to a misunderstanding of the business cycle and the money supply’s role in it.

This is both patronizing to the 19th century Left and ahistorical. Under hard money banking, power flows to those who can hoard hard-money the best (i.e, those who have accumulated capital to begin with) – hence the development of core-periphery systems in New York, London, Paris, etc. Working class people whose incomes typically barely matched their spending needs (if that) were in trouble in a hard-money system because they couldn’t save, because they were dependent on industries for employment who were in turn dependent on credit to finance their high fixed costs, and because they were more likely to be debtors than creditors.

This isn’t very hard to figure out – deflation increases the value of money, inflation decreases it. Which is better for people with money, and which is better for people without?

All the major financiers pushed for a central bank in the United States, and they all rallied behind the Bank of England to secure their credit lines and profit margins in the 19th Century.

What the financiers wanted was a private central bank, what they didn’t want was a public central bank. The Aldrich Plan was for a private central banking system, and its proponents bitterly opposed a public central bank, because a public central bank gives a democratic state independence from the financial markets.

You have failed to address my point that in today’s age, the financial sector is extracting a ton from society without adding anything back. And those activities are all enabled by central bank fractional reserve banking.

And all those extractions could be counter-acted by a public central bank using the powers of fractional reserve banking for the public interest.

The problem isn’t fractional reserve banking, it’s the capture of the reserve banks.

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StevenAttewell 06.26.11 at 10:25 pm

* “J.P Morgan for most of his career didn’t have access to” central banking.

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Chris Bertram 06.26.11 at 10:31 pm

Hidari, no that wasn’t all you were saying. You were saying, or implying, that Marx anticipated the ecological critique of capitalism and that John Bellamy Foster shows this. But I’m unconvinced that there’s much systematic on the subject in Marx, as opposed to this or that passage or remark that we seize on with the benefit of hindsight. But I don’t think it matters all that much. People like Trotsky are relevant just because they read the works Marx chose to publish and took them to be saying certain things. Of course, we might like to find certain other things there, but the fact that Marxists in the 40 or so years after Marx’s death failed to notice them is suggestive of something, though not definitively so.

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Martin Bento 06.26.11 at 10:34 pm

I will also agree that “No wonder you guys are all failures” makes the speaker appear very adolescent at the very best. I was tempted to ignore, but I think the left needs to start taking monetary and banking issues more seriously, and not just steer away from them as “crank territory”, so I engaged. I also notice in the article someone linked that Cosma dismisses the private nature of many central banks as a “transparent legal fiction”. In the US, at least, the private interest is very real, though not complete, in both dimensions in which ownership is generally constituted: claim on profit and formal control. At this moment, bank-appointed figures hold half the votes on the FOMC, and all the non-voting seats. Originally, they held all the votes.

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John Quiggin 06.26.11 at 11:14 pm

We’re getting a bit off-topic here, but “fractional reserve banking” is just a cumbersome way of saying “banking”. There’s no other kind. Of course, it has the property of vulnerability to runs, which is why we worry about financial regulation.

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Martin Bento 06.26.11 at 11:30 pm

BTW, I also disagree with the implication that Nick’s comment should have been deleted or that crooked timber should be more deletion-prone generally. The comment was arrogant and a bit rude, and I disagreed with it for reasons I outlined, but Nick has expressed a viewpoint no one else here was likely to express, and that, at a minimum, brings up some important issues. Most commenters here are within a certain consensus that makes them more redundant. If they do not comment, it is fairly likely someone else will say something similar. I often refrain from commenting when I think I have nothing unique to contribute. In this context, Nick is unique and evidently sincere: he does not seem to be trolling, at least to me. I very rarely encounter a comment here that I wish had been deleted, even abusive one directed at me, which happens.

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Martin Bento 06.26.11 at 11:37 pm

John, the issue, AFAIC, is that there will be some expansion of the money supply, and it will come from some combination of monetized government debt and multiplier effects as a result of “banking”. Because we think of base expansion as “just printing money”, but do not think of multiplier effects this way, though both expand the supply of money, there is political support for having it all be the banks, which is a huge boon to them. When we see bubbles accompanied by legitimate government tasks unfunded, there is an argument for base expansion with higher reserve rates to tame the expansionary effects. What the term FRB does is make clear that the banks are engaged in monetary expansion. It may be that this is just a matter of rhetoric, but I think it useful rhetoric.

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mpowell 06.26.11 at 11:38 pm

I have to say that I agree with Martin here that Nick is mistaken in most of the claims he makes. I think Nick is confused on what fractional reserve banking is. Without it, a bank is really nothing more than a fancy security vault. The one good point he makes is that it does not make any sense for a modern government to limit the process of money creation to debt creation, which does tend to benefit the financial sector unduly. This is an idea that has become really popular with the MMT folks, but the Keynesians should be looking at the idea of regularly monetizing government debt a lot more carefully. I think the best policy would just be to create and distribute some fixed amount of money each year per capita, but this can easily be approximated by an appropriate tax and spend approach. There is nothing fundamentally anti-keynesian about the idea of sustaining a desired inflation rate partially through direct money creation instead of through debt expansion.

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John Quiggin 06.26.11 at 11:47 pm

mpowell, I did the numbers on this not long ago, and the amount of seignorage governments can get by expanding base money in line with nominal income growth is very small IIRC about 1 per cent of GDP.

The MMT approach, AFAICT, sounds as if it provides a justification for large-scale money creation, and is often presented as if it abolishes the government budget constraint, but actually is just another way of looking at the same arithmetic which says, to a first approximation that in the long run revenue must equal expenditure.

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Martin Bento 06.27.11 at 12:00 am

John, but were you holding multiplier effects constant or trying to offset with them, e.g., by increasing reserve requirements?

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hartal 06.27.11 at 3:01 am

Rudolf Hilferding and the Application of the Political Economy of the Second International
Harold James

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Nick Bradley 06.27.11 at 3:19 am

@Martin Bento -

- Yes I know we did, but when an individual bank expands its supply of notes too fast, it risks collaspe — a compartmentalized system. With a central bank OR “federally synchronized banking”, we see systemic busts. Also, we had banks under the national bank act which gave banks a seal of legitimacy regardless of how quickly they expanded. And even under “free banking” prior to the Civil War, States set stringent requirements on chartered banks, such as requiring them to be capitlized with state bonds — and when those bonds went south, so did the banks.

- In a truly free banking system, which existed in some states in the 1840s/1850s, reserve ratios were very high.

- During this period of deflation, real wages for workers skyrocketed — during the 1880s, annualized real wage increases were almost 4%, the highest in US history.

- Speculators with significant interests in silver screwed the whole thing up, IMHO. by pushing the country towards unworkable bimetalism.

- If we had 100% reserve requirements, demand deposits would not be loaned out, but banks would be heavily involved in taking CDs and other time deposits and loaning them out to borrowers.

- When I say illigitimate land rights obtained through force, I am referring to things like mowing down plains indians and things like that.

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Nick Bradley 06.27.11 at 3:22 am

@StevenAttewell again –

“Under hard money banking, power flows to those who can hoard hard-money the best (i.e, those who have accumulated capital to begin with) – hence the development of core-periphery systems in New York, London, Paris, etc.”

- massive wealth accrues to those who can speculate or who can arbitrage a large loan into a more profitible investment. And loose money greases this process.

“And all those extractions could be counter-acted by a public central bank using the powers of fractional reserve banking for the public interest.”

- Where in history have central banks not been used for the interests of the elite? Gosbank?

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Nick Bradley 06.27.11 at 3:23 am

@StevenAttewell again again –

“J.P Morgan for most of his career didn’t have access to” central banking.”

- it’s called the bank of england, and the extreme profits of his successors 100 years later would kill him with envy.

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Nick Bradley 06.27.11 at 3:25 am

@Martin Bento again –

“I will also agree that “No wonder you guys are all failures” makes the speaker appear very adolescent at the very best.”

- apologize for the coarseness, but it was designed to attract attention, and it worked.

“In the US, at least, the private interest is very real, though not complete, in both dimensions in which ownership is generally constituted: claim on profit and formal control. “

- any illustion that the Fed is independent of the federal government is blown up after reading Arthur Burns’ memoirs.

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Nick Bradley 06.27.11 at 3:27 am

@John Quiggin –

We’re getting a bit off-topic here, but “fractional reserve banking” is just a cumbersome way of saying “banking”.

No. There is hard money banking. Hard money loans are very popular for people buying foreclosures right now. Basically, under hard money banking, you cannot loan out demand deposits, but you can loan out time deposits

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Nick Bradley 06.27.11 at 3:30 am

@mpowell –

“I have to say that I agree with Martin here that Nick is mistaken in most of the claims he makes. I think Nick is confused on what fractional reserve banking is. Without it, a bank is really nothing more than a fancy security vault. “

- You are so wrong on that one. a 100% reserve ratio requirement only prevents banks from loaning out demand deposits. If someone wants to buy a CD from a bank at 3% and the bank wants to loan it out at 6%, they can do so.

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RealisticsPM 06.27.11 at 4:21 am

I’m brand new to this site and discussion – read a little – I reasonably understand socialism and I can’t follow the convoluted talk above. I suggest plain English for plain folk – if they ever run into your site.

Regardless of different money systems – the main cause of money problems is plain old greed.

Prior to WW2 recessions and depressions were mostly – not only – caused by greed – whoever had enough and control to be greedy.

Post WW2, after a slow start, factories, businesses started booming – and, we who can’t stand prosperity – we all wanted more – beyond productivity justification – wages and prices increase together – no net gain. Over a few decades we’re priced out of the market for what can leave the USA .

Thanks to greed – unions – which were important in the 30’s – and no-union employees and management and owners – we convinced ourselves that we had to fight for raises beyond what was justified by production. I recall co-workers and owners complaining about competition. I as a non-union worker said that all I want is my worth in production any more extra cash should be used to reduce prices – competition.

Then I benefit – maybe you agree.

My saying of the time, was – “Unions were needed as a sledge hammer, corrector, over managements head who should have known better.”

To repeat – we are now – un-necessarily, for no net gain – priced out of the market for any production – for domestic sales – that can be physically imported – or overseas sales.

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hartal 06.27.11 at 4:37 am

In reply to John Quiggin.
It seems that the crowd here depends on Sheri Berman’s account of Hilferding’s opposition to Woytinsky’s job creation program (James also speaks of Hilferding’s support of a hard money policy).

But I have some questions.

1. There is no indication that Hilferding was guided as a politician in the 20s and 30s by his theoretical Marxist work; he was, by then, a practical bourgeois politician. James himself raises this objection. The point is that in early theoretical work Finance Capital Hilferding tried to show why balanced growth was not possible and why accumulation would be shot through with crises. Moreover, he provided one of the first analyses of the securitization process and showed how banks could profit handsomely from it. It is a major theoretical contribution.

2. As for what Hilferding proposed (or shot down) and why and what he thought possible given the opposition of the banks to the social democrats and the position of German capital in the world, we don’t know yet in this discussion. We can’t rely on what Woytinsky claims Hilferding said. We have some highly ellipsed quotes from Hilferding that Woytinksy himself provided. It could be that Hilferding did not think he could proceed with huge debt-financed spending for employment without sabotage by powerful bankers, and he just wanted to maintain the illusion of still having the initiative in the crisis. Maybe he wrongly thought that such policy would have had inflationary consequences (it’s easy to understand why he may have been touchy about this), eroded the real wage of the mass of workers, and risked their alienation from the social Democrats. The point is that at present no serious evidence has been presented as to what Hilferding was thinking and whether he was guided by theory, much less his own earlier arguments in Finance Capital.

I am going to read the James account more carefully, but part of the reason that one may be skeptical of the social democratic thesis that there was a New Deal solution available for German capitalism is that the New Deal did not cure even American capitalism. It simply does not hold up to blame the second downturn on FDR’s reversals. The economic contraction was too big to have been caused by that.

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hartal 06.27.11 at 5:17 am

I don’t know if John Quiggin has actually read Sheri Berman’s account, but on p. 113 we find that the Communists were calling for work creation programs against the Social Democrats. So it does not follow from Berman’s book that Marxists had the same sound money or liquidationist policy as the right. There seems to have been confusion as to what followed theoretically and tactically from Marx’s writings. And, quite surprising to me, Berman relies on Hilferding’s antagonist to summarize his position, not Hilferding’s own words and writings. The other surprising thing here is the mischaracterization of Hilferding. He was not only a sound money advocate or liquidationist. He actually proposed very radical policies as Berman’s account shows.

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ejh 06.27.11 at 6:13 am

But I’m unconvinced that there’s much systematic on the subject in Marx, as opposed to this or that passage or remark that we seize on with the benefit of hindsight.

One approach, not necessarily mine, might be that what’s best in Marx is less what’s systematic and more those passages or remarks that we seize on with the benefit of hindsight.

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heckblazer 06.27.11 at 6:41 am

If you’re going to have fractional reserve banking, or as noted banking for practical purposes, you need a central bank to regulate the banks and be a lender of last resort. I won’t argue that they suffer capture to varying degrees, but even so it’s better than having to rely on the whim of the likes of JP Morgan. Getting rid of banking altogether is as practical and desirable as getting rid of dynamite. As the Austrian business cycle theory is empirically false, eliminating banking also isn’t going to solve the fundamental problem of booms and busts (or really the problem of busts. I’m OK with booms :).

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Tim Dymond 06.27.11 at 6:58 am

On page 113 of the Berman book you will find Berman quotes Hilferding directly from a letter to Karl Kautsky: ‘[W]orst of all in this situation is that we can’t say anything concrete to the people about how and by what means we would end the crisis’. Earlier Hildferding is also quoted referring to the need for the business cycle to take its course.

Hilferding plan for building a socialist planned economy was radical, but it had only a limited role for work-creation programs. Work-creation was central to the labor movement program that Hilferding was attacking.

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Ed Marshall 06.27.11 at 7:17 am

Nick, nothing is stopping them from operating a negative interest saving account, they have FREEDOM! Except if you actually understand capitalism, this is never going to happen. You need the right volume of money, invested in a correct investment at the right time and the ability to recapitalize (and Minsky can tell you how unstable this all is, except in your economic regime it wouldn’t be unstable because capital just wouldn’t move. It’s dead).

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Walt 06.27.11 at 8:54 am

Nick Bradley’s comments are even better when read like Bela Lugosi’s speech about building an army of atomic supermen.

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Alex 06.27.11 at 10:16 am

This ideology was opposed to Luxembourg’s, which held that the party would heighten the crisis: by voting against the War Credits, the party would bring down the state itself.

It’s probably worth remembering when this is discussed where the phrase “blood and iron” comes from, who said it, and in what context. During the 1860s, political opponents of Bismarck got control of the Prussian Landtag and tried to assert the power of the purse against him by refusing to pass the budget. He responded by just ignoring them and persuading the courts to rule that there had to be government and therefore cutting off supply was legally absurd. At this point he remarked that the great political questions of the future would not be settled by votes of no confidence but by blood and iron.

I doubt Wilhelm II – of all people! – would have been more respecting of the constitution. It’s a furphy. Germany had a bigger franchise than France or the UK but quite by design there was no wiring from the ballot box to the executive government.

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dsquared 06.27.11 at 10:30 am

You are so wrong on that one. a 100% reserve ratio requirement only prevents banks from loaning out demand deposits. If someone wants to buy a CD from a bank at 3% and the bank wants to loan it out at 6%, they can do so

Presumably when the bank made such a loan, it would retain a “reserve”, calculated as a “fraction” of the new loan? What you seem to be describing here is just a fairly draconian regulatory regime over normal banks, not even narrow-banking.

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bert 06.27.11 at 11:57 am

Regarding JQ’s hopes for meliorative reform, this (front page lead in some editions today) is worth following:
Brussels eyes Tobin tax.
Even if it fails, as it probably will, it’ll be interesting to see exactly how. (One lesser order effect, on UK domestic politics: unless it’s squashed very quickly, it’ll get important parts of the Tory party spitting mad, and aggravate frictions in the coalition.)
Could Obama embrace the idea for 2012, rebranded as the Goldman Sachs Payback Revenue Surge? This may be a rhetorical qauestion.

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philofra 06.27.11 at 12:42 pm

Capitalism is the revolution. It is the ultimate revolution. Nothing has revolutionized the world more. It has been the least violent of revolutions, in the spilling blood sense. It toppled communism without a shot and is a big wedge in revolutionizing the Arab/Muslim world.

I think Marx would be proud of this perpetual revolution that keeps on giving.

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hartal 06.27.11 at 2:10 pm

Yes from Berman’s account we find out that the Communists, arguably more or at least as committed to Marx than the social Democratic Hilferding, were for seemingly big public work programs and Hilferding himself supported limited work creation programs financed by taxes or work loans. Berman tells us that Hilferding thinks that the business cycle must be allowed to run its course but then she summarizes Hilferding’s fairly radical program to restructure the economy, which included nationalization, work sharing and reduction of the working day. That is not allowing the business cycle to run its course. Her account is frankly incoherent. Moreover, when it comes to the actual debate between Woytinksy and Hilferding, she relies entirely on Woytinsky said Hilferding said and thought. Meanwhile, John Quiggin writes about Marxist crisis theory, and there is no attempt to think through what Marx said or what major Marxists such as Hilferding, Grossman and Sweezy said. The approach here reflects Cold War anti-intellectualism.

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hartal 06.27.11 at 2:22 pm

Hilferding was for limited work creation programs financed by taxes or forced loans, but why was he not for the kind of deficit financed work programs proposed by Woytinksy ? It can’t be that he thought the Social Democrats should let the business cycle run its course; he had his own radical program that he tried to implement, and he tried to implement it. We know that all Communists were not opposed to Woytinksy’s scheme, so we should avoid the red baiting that Marxists are just like right wing liquidationists,, leaving of course only the liberal left Keynesians as the adults in the room. It could be that Hilferding thought massive deficit financing would have the bankers sabotage the Social Democrats or that such a policy would require cuts into reparation payments that he did not think was politically possible.

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Walt 06.27.11 at 2:25 pm

Stop being so goddamn lazy, hartal. Just make a fucking argument, rather than casting aspersions.

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hartal 06.27.11 at 2:35 pm

Please don’t use abusive language, and why don’t you show me what you are looking for by pointing to me the kind of argument in this discussion that meets your standards. Or perhaps you could make such an argument yourself. Thank you.

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Nick Bradley 06.27.11 at 2:57 pm

@heckblazer –

“If you’re going to have fractional reserve banking, or as noted banking for practical purposes, you need a central bank to regulate the banks and be a lender of last resort.”

- No you don’t. Without a central bank, bank note arbitrage will quickly destroy those banks who expanded too much.

“Getting rid of banking altogether is as practical and desirable as getting rid of dynamite. “

- who said anything about getting rid of banking?

“As the Austrian business cycle theory is empirically false, eliminating banking also isn’t going to solve the fundamental problem of booms and busts (or really the problem of busts. I’m OK with booms :).”

- why do you believe ABCT is empirically false? It holds more explanatory power for recessions than any other single theory.

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Nick Bradley 06.27.11 at 3:06 pm

@Ed Marshall –

“Nick, nothing is stopping them from operating a negative interest saving account, they have FREEDOM!”

- real interest rates on savings accounts are negative. What’s your point? In a deflationary environment, banks would have to pay savers a yield high enough to talk them out of burying their money in the backyard. Savers get a higher return, banks get a lower return. What this leads to (as I’ve said before) are banking co-ops — credit unions, etc.

“Except if you actually understand capitalism, this is never going to happen. You need the right volume of money, invested in a correct investment at the right time and the ability to recapitalize (and Minsky can tell you how unstable this all is, except in your economic regime it wouldn’t be unstable because capital just wouldn’t move. It’s dead).”

- Minsky’s theories can be described as a synthesis of austrian business cycle theory and kenyesian policy prescriptions. The only difference between mises and minsky is that minsky felt the boom-bust cycle was exogenous to capitalism (caused by central banking) while minsky felt it was endogenous.

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Walt 06.27.11 at 3:10 pm

Abusive language? Really? Is it the cursing? Or is “anti-intellectual” a neutral term in your mind?

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Nick Bradley 06.27.11 at 3:12 pm

@dsquared –

“Presumably when the bank made such a loan, it would retain a “reserve”, calculated as a “fraction” of the new loan? What you seem to be describing here is just a fairly draconian regulatory regime over normal banks, not even narrow-banking.”

No you don’t understand the multiplier effect. under fractional reserve banking, if the reserve req is 10% and deposits total $100, banks can make $1,000 in loans. Under hard money banking, that bank can make $100 in loans.

See this graph from Wiki
http://upload.wikimedia.org/wikipedia/commons/4/42/Fractional_reserve_lending_varyingrates_100base.jpg

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StevenAttewell 06.27.11 at 3:18 pm

Hartal, I think you’re misreading Berman to give Hilferding too much credit. “Limited work-creation program financed through increased taxes and a forced-loan program” adopted at the last minute to forestall a more thorough-going alternative is a different animal entirely from the kind of deficit-spending mass work-creation programs pioneered in Sweden and the U.S.

And Berman quotes Hilferding specifically on theoretical grounds on p. 114. “Our program rests on the conviction that labor, and labor alone, creates value…Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to a collapse of this system. If [Woytinsky et al] think they can mitigate a depression by public works, they are merely showing they are not Marxists.” This is pretty clear cut.

I’d also point out that “the New Deal did not cure even American capitalism. It simply does not hold up to blame the second downturn on FDR’s reversals. The economic contraction was too big to have been caused by that” is wrong on its face.

GDP growth (mid)1933-7 averaged about 13.25% a year. WPA spending alone in 1935-6 was approximately 5-6% of GDP per year. Unemployment fell from ~25% to 9.2% in the same period. Half of that drop came directly from New Deal jobs programs.

The turnaround of 1937 dropped U.S government spending by $1.6 billion and increased taxes by $1.6 billion – 3.5% of GDP. Combined with a tightening of monetary policy the economy shrank by 5% (with fiscal policy accounting for 70% of the drop) and unemployment grew from 9% to 12% (again, 50% from the WPA shrinking alone). When this was reversed, unemployment fell back to 9% and GDP returned to growing by 12.35% a year.

See Patrick Renshaw “Was There a Keynesian Economy in the USA between 1933 and 1945?” Journal of Contemporary History, Vol. 34, No. 3, (Jul., 1999) and Michael Darby “Three-and-a-Half Million U.S. Employees Have Been Mislaid” The Journal of Political Economy, Vol. 84, No. 1, (Feb., 1976)

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hartal 06.27.11 at 5:10 pm

Thank you for the thoughtful and important response, Steven Attewell.

Let’s see what we can attribute to the change in government expenditures alone.

Given that real GDP growth fell by 16 percentage points from 1936 to 1938 and the change in government purchases as a share of GDP fell by 2 percentage points (from 3.5 percent to 1.5 percent), how can you say that much of growth change came from the change in government expenditures, even taking multiplier effects into account? But it seems that no more than twenty percent of the fall in GDP growth can be accounted by changes in government expenditures; it’s not clear how much the changes in the monetary base and taxation account for.

And there is also the question of why FDR felt compelled to contract government expenditures. Unemployment had fallen, labor was restive which compounded the problem of low marginal efficiency of capital and (even before the reduction in government expenditures) new investments in plant and equipment were faltering as inventory spending had reached its limit (this is what I remember from reading Sumner Slichter). Business confidence was shaken. FDR made sacrifices to what Krugman calls the confidence fairies, but this leaves open the question of whether the downturn would have even before severe had he not made a turn to austerity.

At any rate, the reversal of the situation was not due to just changes in government expenditures but more importantly war time planning.

Again Berman’s argument makes no sense. That Hilferding did not think a massive debt financed jobs program would be effective or possible (again we don’t know his reasoning) does not mean that he counseled genuflection before the laws of the market. He proposed nationalization, work reduction and work sharing.
The Hilferding quote that you take from Berman has internal ellipses, and Berman has the most important quotation from Hilferding coming from his antagonist.

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StevenAttewell 06.27.11 at 5:22 pm

Looking at the 1937-8 change is better than 36-38, given that the downturn happened during the middle of the year. So, I see a 70% share of the drop rather important.

FDR didn’t feel compelled by outside events – after all, he’d just been re-elected in a massive landslide on a program of more spending. His turn was much more motivated by his own intellectual heritage, which contained elements of traditional Gold Bug ideology. I don’t think the downturn would have happened period – especially given how strong growth was in 1939 and 1940.

Internal ellipses are one thing. But “Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to a collapse of this system. If [Woytinsky et al] think they can mitigate a depression by public works, they are merely showing they are not Marxists” doesn’t look disputable from my perspective. I think you need to come forward with some primary evidence to dispute Berman here.

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hartal 06.27.11 at 5:46 pm

Again, Steven, Berman’s evidence contradicts itself. She (and Quiggin) claim that Hilferding thought the social Democrats should sit idly be; but then Berman herself outlines Hilferding’s rather radical program that he wrote up as legislation.
It can’t be both; moreover, we are never given a credible account of Hilferding’s political, economic or theoretical grounds for opposition to the deficit financed job creation program. Maybe he thought the banks would sabotage such a program, so he wanted to nationalize them first–hence, his radical proposals? Who knows?
By the way, Sumner Slichter also believed that the experience of the New Deal showed the limits of fiscal policy (or pump priming) and monetary policy. He too did not think that much of the second downturn resulted from government fiscal contraction or veterans’ benefits having already been paid. He sees little evidence that fiscal policy was stimulating actual purchase of capital goods by private firms. He also thinks that loose monetary policy led to a speculative run up in inventories, not real investment in plant and equipment. See
The Downturn of 1937
Sumner H. Slichter
The Review of Economics and Statistics
Vol. 20, No. 3 (Aug., 1938), pp. 97-110
I of course support the second fiscal stimulus that Krugman and DeLong are calling for. I would also pay attention to the problem of competitive devaluation (Stiglitz) and some of the risks of ulta low rates (Rajan). However, I much less confident than Krugman, DeLong and you that the crisis would be so overcome, so I suggest that we must remain open to more far reaching institutional change. Roberto Unger has such a position as well.

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StevenAttewell 06.27.11 at 5:58 pm

Except that his plan was less than radical when it came to job creation, and it doesn’t strike me as particularly genuine, given the timeline.

As for Slichter, I think we have to recognize the advance of economic statistics and methods in the interim. At the same time, Slichter was a pre-Keynesian economist.

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hartal 06.27.11 at 6:11 pm

Yes it may have been less radical in regards to direct job creation but why was he opposed to it? You say that because not only did he think nothing could be done, he didn’t want anything to be done. His counterproposal was not genuine, you aver.
Maybe, maybe not. Let’s assume so however.

That may have been because he thought the banks would sabotage his proposal just as it would have the job creation proposal. Was he wrong?

Or that he thought deficit financing on a large scale was impossible given reparations payments. Perhaps he feared inflationary consequences. Perhaps rightly, thinking that the erosion of the real wage would deprive the Social Democrats of their main electoral base.

Or maybe he thought the business cycle would soon run its course because he had given up the Marxist theory of catastrophe. This seems quite likely. Hilferding seems to have become increasingly conservative in economic theory in the 1920s,.

Or maybe he could not see how large scale deficit financing would stimulate private investment in those specific conditions.

Our modern statistics do not show that the cut in government expenditures/veterans’ benefits account for much of the contraction in 1936-1938.

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Hidari 06.27.11 at 7:31 pm

106

Tom Addison 06.27.11 at 8:47 pm

What do you make of the ideas that Anatole Kaletsky puts forward in his book, Capitalism 4.0, that capitalism will merely learn from these crises and redevelop itself into a stronger, improved form?

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MyName 06.27.11 at 8:52 pm

>No you don’t understand the multiplier effect. under fractional reserve banking, if the reserve req is 10% and deposits total $100, banks can make $1,000 in loans. Under hard money banking, that bank can make $100 in loans.

Which doesn’t really explain how your system is different and/or better than the current banking system. The issue with the financial boom/bust cycle is still credit related. Banks assume a certain amount of risk when they issue a loan. They continue to make profits as long as that failure percentage is less than difference between what they gain in interest and what they out in interest.

However, in a market system, there are winners and losers and if the bank backs the loser they are out the money they lended. If alot of people they lend to are losers, which can happen, then they lose money and are unable to pay the CDs or other people who may have invested in the bank hoping to make a decent return (including other banks). This can lead to a run on the bank either directly, because other people hear about the bank’s difficulties or indirectly due to a cash flow crunch causing people to lose confidence in the bank. This problem will not be eliminated under your system as other funds deposited to the bank are still available as assets to people who loaned money to the bank.

Of course, you could eliminate inter-bank lending entirely, but then you have the problem where banks would be unable to fund large scale capital projects unless they had access to a large number of depositors. Which means only very large banks could function, and you have anti-competitive capital systems that also hurt consumers and individuals.

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EricTitus 06.27.11 at 9:32 pm

The crucial difference I see between keynesianism and marxism is that Marxism views crises as arising from conflicts within the capitalist system (although recent efforts have also focused on capital accumulation). Now I have to say that there is a case for a conflict-based approach in studying recent crashes/issues. Growing inequality in the US, shifts from fordist production, etc could be argued to have caused a shift to debt-fueled growth, which reached its peak (negative savings rate) before the recent bust. Not saying Marxism is necessarily the way to go, but it is an interesting alternative perspective.

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heckblazer 06.28.11 at 2:24 am

“Minsky’s theories can be described as a synthesis of austrian business cycle theory and kenyesian policy prescriptions. The only difference between mises and minsky is that minsky felt the boom-bust cycle was exogenous to capitalism (caused by central banking) while minsky felt it was endogenous.”

There’s a rather big difference in implications. If the business cycle really is an endogenous problem eliminating central banking does nothing to address to it (I assume you meant to say Mises thought it was exogenous). FWIW I think excessive leverage leading to a Minsky Moment is likely the best explanation the current financial crises.

“No you don’t. Without a central bank, bank note arbitrage will quickly destroy those banks who expanded too much.”
Who picks up the pieces then after those foolish banks deservedly implode? With free banking in the US the average bank lifespan was five years, and if there was a run you were SOL.
If you instead of a wild west environment you’d support a government body that has the power to enforce banking and accounting rules, make emergency loans, and generally wind up business smoothly when financial institutions fail …well, that’s a central bank.

“Getting rid of banking altogether is as practical and desirable as getting rid of dynamite. ”
“who said anything about getting rid of banking?”

Ending fractional reserves ends banking as we have known it for the last few centuries. Admittedly, this was a pre-emptive strike against using Minsky in support of ending fractional banking, as it would imply ending leverage in all cases and not just deposit accounts.

“why do you believe ABCT is empirically false? It holds more explanatory power for recessions than any other single theory.”

I base that on my layman’s knowledge of the history of banking and expert opinions by the likes of Paul Krugman and Milton Friedman. The latter found a lack of correlation between interests rates and recessions that should be seen if the Austrian model is correct. I have a strong hunch we’re not going to convince one another on this particular matter.

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heckblazer 06.28.11 at 2:29 am

Now for something on the topic of the actual blog post:

My own take as to why Marxism failed as a revolutionary ideology is because it was very successful as a reform movement. When I look back at the list of specific demands made in the Communist Manifesto I find it striking how they’ve either been directly fulfilled (e.g. universal education) or answered in a less radical fashion (e.g. land reform short of full government expropriation). Despite the myriad of problems we have today I wouldn’t hesitate to call the contemporary US and Western Europe workers’ paradises in comparison to the state they were in circa 1840. Keeping the Overton Window open is not a bad triumph.
http://en.wikipedia.org/wiki/Overton_window

I’d also note that in looking at the modern economy, the people who “control the means of production” are most accurately called “managers”. These days the people who own large companies (i.e. the stockholders) are generally separate from the people who actually make the decisions; when there’s an exception it’s generally because the managers used their power to give themselves access to ownership (e.g. stock options). I find this distinction important because it means that government ownership doesn’t end the divergence of interests between managers and employees. It’s also important because you can’t just eliminate managers, you also have to introduce a radical new organizational structure (that’s also I think a major implementation problem Communism had; calling everyone a worker does not magically turn everyone into worker, no matter how many people you shoot).

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StevenAttewell 06.28.11 at 3:17 am

Heckblazer makes a very good point – Andrew Jackson’s banking system is about the closest we’re ever going to get of a simulation of what happens when one abolishes central banking. And it was awful: the Panic of 1837 lasted five years, then another recession in the late 40s, then the Panic of 1857, etc.

Free banking is a bad idea, and there’s a reason it didn’t last.

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Guido Nius 06.28.11 at 8:18 am

107: you could of course also go for a simpler solution: keep the structure but change the remuneration/selection of managers in ways that are not aligned with more is better, and free market. Mostly people who become managers become managers because that’s what they like to do.

[Yes, now I have opened myself up for criticism on managers being by definition useless. To this I say: 107.]

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Random Lurker 06.28.11 at 8:52 am

No you don’t understand the multiplier effect. under fractional reserve banking, if the reserve req is 10% and deposits total $100, banks can make $1,000 in loans. Under hard money banking, that bank can make $100 in loans.

I think that YOU don’t understand fractional reserve banking:
Under fractional reserve banking, if the reserve req is 10% and deposits total $100, banks can make only $90 in loans, since the other 10$ are to be kept as reserve. Then guy A, who has loaned the 90$, uses the 90$ to buy a house from B.
B then takes his 90$ to the bank. The bank thus has to keep 9$ of additional reserve, but can then loan 81$ to C, and so on.
Note that the bank always has in deposits 100% of the value of the loans that it makes: in my example, when the bank loans the 81$ to C it has 190$ in deposits, since it has both the 100$ of initial deposits and B’s 90$ deposit.

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heckblazer 06.28.11 at 10:17 am

Guido Nius 06.28.11 at 8:18 am
“107: you could of course also go for a simpler solution: keep the structure but change the remuneration/selection of managers in ways that are not aligned with more is better, and free market. Mostly people who become managers become managers because that’s what they like to do.”

I was very definitely trying to emphasize that the destruction of the capitalist/managerial class is a bad plan if you don’t have a good idea for the replacement. As I very much do not have such an idea I too would go with reforming existing structures.

There are a couple of ways to change corporate behavior. One as you mention is to change corporate culture so that narcissistic assholes are no longer tolerated; turning Donald Trump from a role model to a bad joke would be a good first start. From my understanding obscenely paid self-promoting jerks like Trump just weren’t tolerated in the executive culture of 30-40 years ago. As for the relentless focus on quarterlies, that could be reduced by changing the standards of fiduciary duty in corporate laws. and so reduce the potential for shareholder lawsuits against management when it decides not to grasp at every last possible cent in a quarter. Rolling back the current trend of every executive insisting they need to be paid above the industry average would also be a good start.

“[Yes, now I have opened myself up for criticism on managers being by definition useless. To this I say: 107.]”

While they can be a pain in the ass, you need people to coordinate everyone
when pursuing large complicated projects. If you eliminated all of the officers in the US Army (pretty equivalent to management IMO) tomorrow you’d cripple it’s ability to do anything

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Henri Vieuxtemps 06.28.11 at 10:19 am

You’re both correct, children. The system without central banking sucks, and the system with central banking sucks too. That’s the whole point, the ‘contradictions’ thingy.

Because it’s driven by greed and fear, and advanced by ingenuity. Well-meaning managers are trying to build various clever contraptions to redirect, to channel greed and fear into some sort of common good, but ingenuity inevitably prevails, the contraptions inevitably fail, their guardians inevitably get corrupted, and the whole thing gets just as bad or worse than it was without those clever contraptions. End of story.

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Hidari 06.28.11 at 10:51 am

@Heckblazer:

‘My own take as to why Marxism failed as a revolutionary ideology is because it was very successful as a reform movement.’

Precisely. I think it’s so easy to look at the last 200 years and see it as being a triumph of capitalism. But, ipso facto, one could equally well look at at the last 200 years and see a triumph of reformist socialism. After all, when ‘modern’ industrial capitalism began in England it led to a truly awful situation, as documented by Engels. But almost immediately a counter-attack began. As you pointed out, the programme of action of the Communist Manifesto must have seemed impossibly Utopian at the time, but actually almost all its proposals have been implemented. And this process (i.e. of increasing ‘fightback’ AGAINST capitalism) continued throughout the 19th century and throughout the 20th as well, until the late 1960s or, arguably the late 1970s, although obviously the tide ebbed and flowed.

And there was a good reason for this which was (as the initial post argued) Marx demonstrated that capitalism was and is inherently unstable. When Gordon Brown said ‘no return to boom and bust’ he might as well have said ‘no return to capitalism’. Capitalism IS boom and bust. And Marx also pointed out that the general tendency (ceteris paribus) is for these ‘busts’ to ‘get worse’ over time (which doesn’t mean that every recession will be worse than the last one, but that, over time, a trend, of recessions tending to get worse, will become apparent).

What Marx got wrong wasn’t the strength of capitalism but the strength of (reformist) socialism to ameliorate the worst of the capitalist system.

This is why, whatever else one thinks of them, Thatcher and Reagan were amongst the most radical thinkers of the last 200 years. Almost everyone before them had looked at the horrors of early 19th century England and recoiled in horror. In other words they believed in ‘progress': defined as progress away from ‘laissez-faire’ capitalism.

Thatcher and Reagan alone looked at the slums, the physical and sexual abuse, the poverty, the disease, the filth, the laughable ‘justice’ system, the grotesque gap between rich and poor, and thought ‘Ah yes! That’s where I want to live.’

And that’s what’s been disturbing about politics since 1979. No one could have predicted that the ‘great recession’ was going to happen when it did or how it did. But anyone with even a passing knowledge of Marxism (or the history of capitalism for that matter) could have predicted that something like it was inevitable at some point. We knew, in advance, that eventually the Reagan and Thatcher ‘revolutions’ would end up like this. And yet we did nothing. Well actually we did do lots of things but they invariably made the situation worse.

Luckily, again, reformist socialism to the rescue!

Die hard ‘free traders’ suddenly dusted off their copies of Keynes, nationalised intensively, took control of the economy and ‘we’ were saved.

Well some of us at least.

This would have been the perfect time for democratic socialists to say ‘I told you so’ but of course they were as much in thrall to market lunacy as everyone else. And so we go on much as we did before.

This is disturbing because as Marx has shown we know only one thing: that there will be another gigantic ‘crash’. I don’t know if it will happen in 1 week, 1 year or 10 years, but I do know for a fact that it is coming. I also know that the probability (not certainty but probability) is that it will be worse than the ‘great recession’. And I also know that many of the ‘weapons’ we could have used ‘against it’ have now been used.

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dsquared 06.28.11 at 11:13 am

No you don’t understand the multiplier effect. under fractional reserve banking, if the reserve req is 10% and deposits total $100, banks can make $1,000 in loans. Under hard money banking, that bank can make $100 in loans.

I think Random Lurker’s analysis is correct and you are confusing deposits with capital here. Under narrow-banking, deposit taking banks are not allowed to make loans at all.

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Random Lurker 06.28.11 at 12:10 pm

I’m very interested in the argument of this thread, because I’m a self described marxist.
There are many points on wich I agree, and many on which I disagree, both in the post and in the comments; however, since I’m late at the party, I’ll just drop in my supercool crisis theory, that I call Marx+Minsky, or M+M.
In Marx’s model, capitalists continuously produce more than what workers can consume, the difference becoming “profits”, and use at least part of the profits to increase their capital stock. This leads to an overaccumulation of capital whith regard to consumption, thus could be seen as an “overproduction” problem in Marx’s terms or as an “underconsuption” problem in more modern words.
However in this model would not produce cyclical crises, this would produce just a permanent depression or a continuous downward spiral.
In my opinion, Marx theory of economic cycles could be explained this way: the capitalist economy is always in recession (thus the law of the diminishing rate of profits), however some exogenous events may happen, that give an upward bump to the system and keep the system afloat (in this sense, it is the specular opposite of “real” business cycle theories).
However what we experience in the real world usually is not a continuous underconsumption problem, but some discontinuous financial crashes.
We could reconcile Marx’s theory adding Minsky’s theory of financial cycles to it, thus obtaining:
1) “capitalists” constantly overproduce stuff with respect to the wages they pay, thus creating the condition of an underconsumption crisis;
2) but then they are demand constrained, so have no incentive to further increase material production. Since they are thrifty and don’t consume all their profits, they use their “excess capital” as financial capital, giving it, for example, to a bank wich pays interest on it.
3) But as they loan the money, the guy who gets the loan spends the money on something, thus the same money is still counted as a credit asset by the capitalist class and used as “demand” to buy the capitalists’s products.
4) this creates a boom period that only lasts as long as the total leverage in the system increases…
5) until the system reaches a Minsky moment and a financial crisis happens.

Thus in my view the financial system hides the “contradictions” of capitalism in financial umbalances, until those umbalances became untenable and we have a crisis, that we perceive as “financial” although its roots are in the umbalances of the “main street” capitalist production.

You might wonder, “what are the advantages of the M+M theory over, say, just Minsky”?
It is interesting, in my opinion, because it helps to explain the problems of both keynesian and monetarist policies:
In keynesian policies the state is supposed to overspend in crisis times and underspend (or overtax) during booms. This however cannot work according to the M+M theory, because the “overproduction of capital” is a continuous process, so that in pratice the state is forced to continuously overspend.
In monetarist policies, the central bank in pratice just avoids the “Minsky moment” by lowering the interest rate, and gives an upward bump to the economy, but then has big problems when it tries to rise the interest rate because it would be very antistimulative, so sooner or later will reach the 0 interest lower bound.

The only remaining solution seems to be a volunatary very inflationistic policy, that in pratice redistributes wealth from financial capital to wages. However also this policy seems to be not sustainable, both because it is clearly redistributive and because “capitalists”, if expect inflation, would simply invest their wealth in some other currency or some other “defensive” investment.

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Walt 06.28.11 at 12:38 pm

RL: I don’t understand why in your theory capitalists must continually overproduce relative to wages. If they overproduce, why don’t they just cut prices to sell all of their output? You see overproduction at the ends of booms, but why would they continually overproduce, when they can just cut prices?

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Guido Nius 06.28.11 at 12:45 pm

111, heckblazer: I think Donald Trump is a bad example. This could well be a stand-alone sentence but it is also specifically true in this case. He is not ‘just’ a manager. I guess he is not even a manager at all.

One of the things that could be done would be to split managers – and politicians for that matter – as a separate body of people to avoid conflicts of interest. Transitions would be possible only after some kind of grace period ensuring that they remain independent.

Maybe the class of managers could become civil servants with restricted pay scales, eliminating the ‘market’ effects that make managers to confound their personal gain for specific deals with the gain of the unit they are responsible for.

There would be no issue in having the restricted pay scales at levels much higher than the average pay. This would merely acknowledge a reality that even the communists de facto acknowledged.

PS: 30 or 40 years ago Donald Trump was much less of an exception than he is now, it was only done outside of the public eye. I hate assholes but I hate them even more if it is possible that they keep their assholeness to themselves.

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dsquared 06.28.11 at 1:35 pm

I must confess that my own theory of the crisis looks rather threadbare in comparison, given that I started four years ago with the phrase “It is a property of complex and volatile systems that they have complex and volatile dynamics”, and haven’t really progressed at all.

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Random Lurker 06.28.11 at 3:10 pm

@Walt 116
This is the part that comes from Marx, so this is not exactly my theory, but Marx’s theory. It works this way:
Capitalist John invests a certain amount of money X. He does this in order to make a profit, which means that, in due time, he expects to have back X+p money, where p represents profits. If p was 0 then John would have no reason to invest.
X is used to acquire fixed capital (F), buy raw materials or parts (C), and pay workers (W).
W becames demand, since workers are supposed (by both Marx and Minsky) to have no net savings on aggregate.
C and F are produced by someone, usually some other capitalist, and thus will be composed by p’ (profit for the second capitalist), W’, C’ and F’. C’ and F’ will be composed by p”+W”+C”+F” etc., so in the end we just have p° and W° (the total of profits and the total of wages in the chain of production of John’s products).
W° is thus smaller than X, and W°+p° is equal to X but less than X+p, which is what John hopes to gain on the long term.
If all capitalist use all their profits for consumption (what Marx calls “simple reproduction of capital”), they make for the difference between X and W°, and the market is in equilibrium (but not growing).
But in Marx’s opinion, this almost never happens because capitalists use part of their profits to increase their capital, and not for consumption.
The “logic” of this choiche is obvious if you think to financial capital: suppose that I have 100$ of money in a bank, and the bank pays to me a nice 10% interest every year. If I need, for example, only 5$ to live, I could reinvest the 5$ in the bank, so that the next year I would have 10.05$ of interest. Then I could live on arich 5.05$ and still reinvest 5$ etc.

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Henri Vieuxtemps 06.28.11 at 3:43 pm

…because capitalists use part of their profits to increase their capital, and not for consumption.

But doesn’t increasing their capital translate into wages and profits too? The $5 that you saved – someone will borrow it from the bank and spend it, no? No, I think it’s just that the system tends to get out of whack; to, simply, produce too much stuff that nobody wants to buy, even if they can afford it. And then, as firms go under, factories close, and then the demand falls too.

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Tim Wilkinson 06.28.11 at 9:11 pm

Just on this fractional reserve banking thing, it’s right that at a 10% reserve rate, the banking sector as a whole can create loans up to (nearly) a multiple of 9 times the initial amount of currency (and generally, this factor is = the ratio of loanable:reserve funds, in this case 9/1).

I suppose the idea of hard money loans would be that banks act strictly as financial intermediaries: market makers between lenders and borrowers of cash. The bank doesn’t have a reserve rate because it can lend out all the money it receives, but only once – as if it actually had to hand over the same cash that was deposited with it. And I suppose on that basis it would have to ensure that the money loaned out was due back in before it is due to be repaid to the bank’s creditor.

And such a system could still have a reserve ratio too, I suppose: the real difference is that there is no leverage and no multiplier. And why should there be? And in particular why should the banks run at a factor of 9? Is the idea that the banks are so good at choosing socially efficient investments through their lending decisions, they should be in charge of 90% of all investment (and rake off a hefty commission in the process)?

It is of course multipliers, leverage and positive feedback loops of various kinds that underly the ‘volitility’ of the capitalist system and the refusal of those long-run equilibria, optima, etc to ever be actualised. The ‘business cycle’, I think they call it – also known as ‘constant market failure’.

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Random Lurker 06.28.11 at 9:56 pm

@Henri Vieuxtemps 123
It is true that someone will borrow the 5$ I saved, but- he will have to pay interest to me: this is the reason that those 5$ are capital from my point of view (money that can generate other money), and not just the same money that I could have in my pocket.
Tim borrows 5$ from me (through the bank), but in due time he will have to pay back 5.1$. From where does that additional 0.1$ come?
If he borrowed to consume, that is demand that is pulled from the future, and the system is unstable unless leverage can grow undefinitely (which seems unlikely).
If he borrowed to invest (say he is building a car factory with those 5$), the 5$ are actually paid in wages, but the 0.1$ of interest has to be payd from his future profits. But nobody ever put that additional 0.1$ of demand in the market.
The concept of “credit” only makes sense, in a capitalist logic, if it is “credit at interest”.

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Alex 06.28.11 at 10:56 pm

One point about fractional reserve bashing. All else aside, how do you get from here to there without an absolutely brutal deflation that would utterly mangle everyone but rentiers? Going from 9:1 leverage in the biggest credit creation sector to 1:1 is quite the step. Look how ugly it’s been reducing leverage in the last three years. Then multiply.

Some might think the hard money libertarians who like this actually like it as an excuse to liquidate labour, liquidate the farmers, etc, rather than on its merits whatever they may be. That includes the Ron Paul this decade/Bob McManus types who like left-wing rhetoric but hard-right gold standard let’em starve economics. (Well, Bob did in 2008-2009. More recently he’s been a modern monetary theorist. Whatever.)

Anyway, practicals. How do you eliminate 90% of world credit without slaughtering everyone who benefits from credit creation – i.e. workers, farmers, and entrepreneurs? Do we shift to safety deposit box banking and also increase the monetary base by 90%? Or is the point that credit should be nationalised – in which case you can’t have the other libertarian pony of a balanced budget amendment?

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sg 06.28.11 at 11:34 pm

my guess, Alex, would be that the libertarian solution to this problem works the same way as all the rest:

1. abolish fractional reserve banking
2. competition!
3. …
4. Ponies!

I’ve never seen a problem that couldn’t be solved in the libertarian mindset with those 4 easy steps. Just remember that step 3 is essential!

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Tim Wilkinson 06.28.11 at 11:55 pm

Yes, credit should be nationalised, or merged in some way with the tax/issue system. And yeah, while we’re at it, may as well increase the monetary base by 900% (rather than 90%). I suggest keeping this one quiet until after the election win though, and then acting very quickly indeed, to avoid any unpleasantness.

On firmer but less interesting ground, if a 10% reserve ratio equates to 9:1 leverage, 1:1 l’age is actually equivalent to a reserve ratio of only 50%, not 100%. The latter would be 0:1.

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john c. halasz 06.29.11 at 6:07 am

Walt @119:

Yes, RL has it crudely right. The reason that increased output can’t be sold at lower prices is that it ends up being sold below the cost-prices of production. With the increasing concentration of production at high fixed, long-run capital costs, the increase in real and potential output exceeds any corresponding increase in wage-based demand, (even though lowered production prices mean increased real wages, though equally, at least medium-run, lower high-wage employment due to increased productivity). There is a fundamental asymmetry between wages and profits involved, since, after all, investment is ostensibly motivated by a competitive desire to increase profits, (and thus lower production costs, including labor). though the same tendency toward higher concentration of capital investment/increasing returns-to-scale also produces excess profit that need to be reinvested into increased production and corresponding demand. Er, else the current market value of capital assets depreciates, due to an over-supply of capital/”investable funds”. Constant demand creation is required together with the rising wages to sustain such demand, but such rising wages would eat into the “value” of capital and reduce its investment “incentives”. Which is part of the point of Marx’ deployment,- but also critique,- of LTV. One can think of the “mass” of labor-value as what would be required to sustain full employment at wages sufficient to sustain long-run aggregate demand. And that basically is what Marx’ 150-year-old prognosis doesn’t think possible under a capitalist regime.

“The tendential law of the falling rate-of-profit” concerns profits-of-production and is a complex thesis about the effects of increasing technical productivity in the trade-off between capital and labor, wages and profits, -(and, to add a further slightly OT wrinkle, the struggle over who controls actual labor/production processes and the public or private ends they serve),- which amount to an inverted mirror-image version of Schumpeter’s “creative destruction”- (since the effects amount to at once a destruction of the “value” of extant capital stock and the financial claims upon then and a displacement of labor, which will only be re-employed on similarly asymmetric, profit-enhancing terms). But, I think the key point here is that financial “assets” are basically a paper claim of the profitability of the productive system, and hence invertedly mirror and re-produce whatever is transpiring therein. When profits from production decline, partly through the wage-share, but also from the very reduced costs of “commoditized” technically efficient production, profits will tend to be recycled into financial “assets” and industrial booms (or busts) will result in financial bubbles (and crashes).

So, I think, the key question is what is the political-economy of state-power that allows this to happen and perpetuates it. Yes, state policy action can attenuate this basic “problem”, basically by providing further investment opportunities for accumulated profits and corresponding employment opportunities for labor. But how long can that last and what are the extant, entrenched power-configurations that prevent any such policy-program from being enacted? But the basic problem of the realization of productive capital and its public or private distribution and the ends and failures which it would serve remain in any political-economic system remains. Which isn’t solved by any simplistic Keynesian account. Though that’s the sort of question Marx was addressing about the self-transgressing limits of capitalism,- (BTW a term that post-dated his death). Even if Marx is “dead”, the matter of what is outside capitalism and its limits remains, really, not just theoretically or intellectually. But what’s fairly clear is that neither the prevailing system of finance, (which might easily be replace), nor it’s distribution of collective “benefits”, is worth keeping or defending.

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William Timberman 06.29.11 at 6:58 am

Thanks, JCH.

It would be hard to put it any more clearly. I feel a little sorry for those who try so hard to believe — against their better judgment — that if we could just convince the masses and their representatives to leave the maintenance of our economic machinery to the bushy-tailed disciples of Keynes, all manner of things will be well.

Sorry, but there’s no end of history here, Professor Fukuyama — there’s lots more still to come, and no one we can trust to tell us how it will all turn out. But then Novus Ordo Seclorum has always been the unfulfilled promise, hasn’t it? That’s the beauty of it, I suspect.

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Walt 06.30.11 at 10:58 am

Random Lurker, thanks for the detailed response. I’m not quite clear where the profits come from in your story, though. The capitalist uses capital and labor as inputs to make some good as output. The difference between the cost of the output and the cost of the inputs is the profits. The capitalist would like this to be as big as possible, so I don’t understand why or how the capitalist plans the level of profit.

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Random Lurker 06.30.11 at 2:28 pm

@Walt 131
The capitalist cannot “plan” profits, but he invests because he expects some profits.
Obviously it often happens that many capitalist invest their money in projects that end up losing money or have their wealth “freezed” in assets that are “underperforming” with respect to the “average rate of profits”.
However, if the “average rate of profit” turns negative (because too many capitalists are losing money), nobody will invest anymore, thus causing a crisis.
In other words, an healty capitalist world need a positive rate of profits, so that capitalist are “confident” and go on investing. To have a positive average rate of profit, obviously the (real) aggregate total profit must be positive too.

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Walt 06.30.11 at 2:57 pm

Okay, now I don’t understand anything. I hope you don’t mind a counterfactual, but let’s suppose that there was a partial revolution that resulted in every firm being worker owned, but that capital is still owned by the capitalist. You’re the worker, and now you own Coca-Cola the company, including its trademarks and its secret formula, but I’m the capitalist, and I own the bottling plants. You have the upper hand in negotiations, since only you can make Coca-Cola, but you still need me for production. Suppose that there are lots of capitalists, so I don’t have a monopoly, but you still need someone to make and fill your bottles. You rent the bottling plant, and pay me some amount of money as rent. Does this rent count as profit? As long as it is nonzero, I still have incentive to invest to upgrade my bottling plants. In this counterfactual, would you still see overproduction?

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Random Lurker 06.30.11 at 10:38 pm

@Walt 133
Your example reminds me more of a socialist economy, since the big company owned by its workers reminds me very much a public company owned by the state, and the small capitalists remind me the kulaks.
I think that in this case a genral “overproduction” crisis could not happen, but the small capitalists would improve their bottling plants in order to increase their share of bottling, at the expense of the other small capitalists. At the end of this process, there would be only a few oligopolists of bottling and some unemployed ex-capitalists.
Would the Coca Cola company hire the ex-capitalists? Would they thus be granted the ownership of the company too, for the only reason that they work there? If so, I think that we should count that as a socialist economy, not a capitalist one.
Obviously socialist economies can have a lot of economic problems, but I think that “general overproduction” is not one of those problems.

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Random Lurker 06.30.11 at 10:41 pm

@Walt 133
Also, I should note that “capitalist” is a term that I use for ease, but in reality there are very few capitalists in the world, whereas most companies are run by CEOs. But since ceos are supposed to maximize profits, they act as if they were capitalists, so that we live in a capitalist sistems without capitalists, but with capital.

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Walt 07.01.11 at 11:31 am

@135 — Understood. We’re working at a very abstract level here.

@136 – In the equivalent neoclassical model, “profits” would just be the rents on capital. So in your theory, is it that capitalists try to earn profits above and beyond the rents on capital? And this leads to overproduction and crises?

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Random Lurker 07.01.11 at 7:44 pm

@136
I would stress that I’m not tryng to explain my theory, I believe that I’m more or less explaining Marx’s theory with modern words (at best of my understanding).
I think that in Marx also profits are just rents on capital, but with two big differences:
1) from an ethical point of view, rents on capital are not acceptable, since the “mere ownership” of capital is not considered a productive activity;
2) The problem is not that “capitalists” try to increase their rate of profit, but that they try to increase their capital in order to increase the absolute amount of profit, so that the aggregate “total capital” increases relative to the aggregate “total consumption” (in value terms).

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john c. halasz 07.01.11 at 10:09 pm

RL has it slightly wrong here, (though it’s a common mistake). Marx’ account was not one of over-production and under-consumption, but rather about the over-accumulation of capital stocks (of whatever kind), due to the peculiarly capitalist compulsion to maintain the valorization of capital through the rate-of-profit, or, otherwise put, to expand “value” in order to reproduce surplus-value. That relentless drive toward expansion, which tends to over-shoot the mark periodically, if not quite predictably, is what characterizes the distinctiveness of capitalist systems, from which over-production, (excess capacity), and under-consumption, (deficient wage-based demand), are symptoms.

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