Saturday, 29 May 2010

The Return Of Illiterate Economics - Part 2 – Keynes Versus Mises

For, the last ten or more years, the economist, Nouriel Roubini, warned of the increasing danger due to rising levels of debt, and excessive liquidity, earning himself the nickname, Dr Doom. Despite the fact that there is no shortage of politicians and journalists who ask why no one saw the crisis coming, the reality is that there were plenty of people warning it was coming. The problem was that the politicians, the journalists, and the Public, didn’t want to hear it because it would have spoiled the fun they were having spending all that cheap credit, and running up the debt! Alongside Roubini, there were many “Austrian School” economists warning that it was a “Crack-Up Boom” that would lead to a bust. But then, the Miseans have been arguing against profligate politicians, and “socialist” central bankers ever since the 1920’s. Similarly, there have been Marxist economists that have been making similar warnings since early in the decade, but then there has been a tradition amongst Marxists of “catastrophism”, which seeks to uphold the view of Lenin and others, again from the 1920’s, that Capitalism had run its course, and was in its Death Agony, an argument against which I wrote at the end of last year, in the Weekly Worker.

Around 1998, I came to the conclusion that a serious crisis was likely, because of what appeared to be massive overproduction. Everywhere I looked, I saw new or nearly new cars, whilst car plants were still pumping out more and more, many of which ended up stored in fields. A similar picture could be seen for other consumer goods. At the time, I fully expected a 1930’s Depression, and possibly even imperialist war. I was wrong. The overproduction was really a sign of a disproportion in the allocation of Capital, a disproportion which the current crisis has begun to resolve, as old monopolies like GM, Ford and Chrysler get restructured, and as new, high-tech, areas of production begin to attract investment. The number of new cars, and other consumer goods, were, in fact, a sign of a new Long Wave Boom beginning, and in the West, the availability of cheap credit.

By the beginning of this decade, my only doubt had become whether the new Long Wave Boom could enable the restructuring of Capital, in the West, and the unwinding of the debt to occur without a large crisis. The Crash of 2001, seemed to suggest it might. The crash of 2008/9 puts it in doubt. Yet, we should remember that even now with the worst financial crisis in history, and on a global scale, the economic crisis has been extremely muted. There has been – yet – no repeat of the Great Depressions of the 1930’s or 1880’s. In fact, not even anything like the 1980’s. Much now depends on the actions of politicians and the economic ideology that guides them. Even “Dr. Doom” himself, Nouriel Roubini, in a recent book, “Crisis economics” with Stephen Mihm, writes that, during a crisis, governments need to be “Keynesian”, spending money to head off the crisis and prop up the system. Only after the crisis can they begin to claw back the debt, and apply free market principles. Yet, no one can surely suggest that in Europe, as a whole, and in the PIGS, in particular, the crisis is over!

Roubini and Mihm accept the basic Marxist premise that Capitalism is a system marked by repeated crises. As Gillian Tett, in her FT review of the book puts it, they are “white” not “black” swan events. But, of course, as a bourgeois economist, Roubini is only interested in putting forward a pragmatic solution to that fact. In that, he has an advantage over the dogmatists like the “Austrians”, who just have an ideological objection to any state involvement whatsoever – an extreme position even compared with someone like Hayek. But, as I have pointed out before, what even someone like Roubini fails to account for is the question why is this kind of Keynesianism seen as appropriate by Capital sometimes, for example, now or during the post-war boom, but not during others, for example in the 1930’s outside the US, or during the 1980’s. Why, on the contrary, during these periods, does Capital see the absolute necessity of balanced budgets?

The answer it seems to me is clear. It depends entirely upon the conjuncture, on the phase of the Long Wave. Monetarists, like Milton Friedman, are undoubtedly correct, as against the Miseans, in arguing that a contributory factor to the 1930’s Depression, was the fact that Monetary Policy was tightened precisely at the moment it should have been loosened. But, Keynes was also right in arguing against a sole reliance on Monetary Policy as a means of countering such Depressions, by pointing out that in those conditions, a loose money policy is like pushing on a piece of string. Make money as cheap as you like, but, consumers will not borrow to spend, if they have no job or likely prospect of one, and businesses will not borrow to invest if they do not see any prospect on the horizon of sustained increases in demand for their products.

But, Keynes, and others, like Mandel, who also falls into a sort of under-consumption theory of crisis, is wrong on two counts. First is the idea that Capitalist crises can be resolved if only Capital applies the appropriate technical remedies. Second, that Capital requires overall rising demand to fuel higher profits to spur investment. What both miss is the combined and uneven development of Capitalist economies. In the 1930’s, in Britain, for example, the Depression brought mass unemployment and falling levels of aggregate demand. In certain parts of the country, like the North-East, traditional industries, like shipbuilding, were decimated. Unemployment was chronic and sustained. Yet, at the same time, in the South-East, new industries were being established in motor manufacture, and consumer electronics. Rates of profit were high, stimulating investment, and, along with it, came relatively high wage rates and living standards. Under these conditions, cheap money, the beginning of consumer credit, COULD finance consumer spending and investment. It was not enough to lift overall aggregate demand, but it does show how even within the Long Wave downturn, even within a Depression within that, combined and uneven development leads to the development of the seeds of the new upturn. In part, this process not only led the way out in the post-war boom, but also laid the basis of the so called North-South divide in Britain. Today, we can see a similar pattern on a global scale.

But, straightforward Keynesian deficit spending could not have offered a solution under those 1930’s conditions. In conditions where businesses do not see the likelihood of sustained rises in demand they will not spend on new investment more than they can avoid. That again is typical of the Long Wave downturn. They will respond to what they see as temporary rises in demand instead with rising prices to make windfall profits while they can. Loose money facilitates that. Similarly, workers will seek, where they can, to raise wages to compensate, and again loose money facilitates that, because employers will concede higher wages, rather than endure a strike, and miss what might be a temporary window of opportunity, if they believe that they can cover them with higher prices. It is a typical price-wage spiral. What you get is not a counter-cyclical reflation, but just stagflation, the combination of, at best, sluggish growth with rising prices. That is what happened with such policies during the 1970’s, and led to their abandonment in the 1980’s.

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