In practice it is not
so simple. Firstly, the experience of John Law and Isaac Pereire
show what is wrong with schemes which promote the idea of limitless
credit creation, unrelated to the expansion of real value. Secondly,
and partly related to the above, the State and international banking
regulation sets limits on how much credit can be created by banks
relative to their assets. But, having said that, its clear how an
Hollande Government, and certainly a Workers Government, could, even
within the realms of Capitalism, and the constraints of the Eurozone,
finance a Keynesian response to the current conditions. The problem
with Law's Mississippi Scheme was that it was a Ponzi scheme, which
produced a bubble precisely because it was unrelated to the creation
of any real new Exchange Value.
An Hollande Government
could avoid that. Suppose such a Government nationalised all of the
banks. If those banks had €100 bn. In deposits, then with a credit
multiplier of 10, they could create money equal to €1 tn. Think of
it like this. The Government employs 1,000 additional teachers. The
cost of a teacher is €50,000 p.a. The Government borrows €50
million on the Bond market to cover this cost, and puts this money
into its bank as a deposit. With a credit multiplier of 10 this
makes it possible to create not just the €50 million needed to pay
for the teacher, but €500 million of new money.
Although the
original €50 million moves from the Government account, it moves
into the individual teachers accounts whose salary it pays. As it
moves from their accounts to pay bills it moves into the the accounts
of those whose bills are paid. So, just at this stage we can see a
Keynesian multiplier in effect. The €50 million of additional
income provided to teachers has in turn created additional demand in
the economy as they spend this income. This additional expenditure
creates additional income for those who supply the goods and services
to meet this additional expenditure. They in turn, spend this
additional income, creating yet more demand, and yet more income and
so on. The effect of this multiplier depends upon what is called the
Marginal Propensity to Consume (MPC). All it means is that Keynes
recognised that Say's Law is wrong. People do not spend all their
income. Suppose, people on average spend 90% of their income and
save the other 10%. In that case, the multiplier is 10, because the
original recipients spend 90% of their additional income, which goes
to the next set of recipients, who then spend 90% of that, and so on.
The higher the MPC, the larger the multiplier. Of course, not all
the expenditure goes on the purchase of goods and services. Some of
it will go to investment by firms in order to meet the demands for
additional goods and services. But, that still creates incomes as
profits, rents, wages and interest, which in turn are spent. One
limitation is the amount of spending which goes to buy imported
goods, because that means that the additional incomes generated are
overseas, and not in the domestic economy.
The graph shows how a given amount of stimulus creates additional expenditure, which creates additional income, and so on.
Because, this has
stimulated real economic activity, the production of new Use Values,
and new Exchange Values in the form of additional goods and services
this is not the same as Law's Mississippi scheme. And, in fact, as
Keynes demonstrated because this brings about this additional
generation of income, one of the consequences is that tax revenues
rise. So, the original Government expenditure and borrowing to
finance it, could be repaid, as a consequence of its additional tax
revenues. In a situation of Long Wave Boom such as we have now, and
where fear is causing money hoarding, there is no reason why that
fear cannot be eased, and the conditions created to reduce the money
hoarding, and thereby stimulate economic activity – thereby
reducing the fear further – by the application of such measures.
In fact, this is very similar to the situation Marx described in Capital
Vol. III, in relation to the operation of the 1844 Bank
Act, and its role in creating the crises of 1847, and 1857, which led
to its suspension.
As I have described
elsewhere, however, this can only work in a period of Long Wave Boom
such as that we have now. It is why Keynesian policies were able to
cut short all of the recessions during the post-war Long Wave Boom
from 1949 to 1974. That is because, it requires that Capital views
any downturn as temporary. It then responds to additional demand by
increasing investment in Constant and Variable Capital, and increased
output. But, in conditions where Capital views any upturn as merely
temporary, as happened in the 1920's, and early 30's, and in the
1970's and 80's, it will respond to it not by additional investment,
but in higher prices. Where they can, workers will respond by
demanding higher money wages to cover those prices. The additional
money tokens put into the system will them be absorbed in these
higher prices (the value of the money tokens will be devalued)
creating the kind of stagflation that was seen in the late 1970's and
1980's.
But let's return to
the example. In addition to creating additional demand, incomes and
employment via the Keynesian multiplier, the teachers also create new
productive capacity in the form of more educated workers which
facilitates competitiveness, which in turn facilitates a rise in the
Rate of Profit, which in turn stimulates accumulation of Capital,
increased employment and so on. However, there is more. Ownership
of the nationalised bank enables the Government to finance not just
this €50 million expansion, but a €500 million expansion as a
consequence of its ability now to create credit up to this amount!
In fact, the Chinese State uses its ownership of the banks in
precisely this way to regulate economic activity in the economy,
alongside its control of local planning laws, and tax policies etc.
to direct investment into those areas it has prioritised under the 5
Year Plan.
Provided such a
Government used its ability to generate Credit Money so as to
stimulate investment and increased economic activity then it will not
result in a bubble. In fact, suppose such a Government used its
ability to create credit money so as to build social housing to rent.
Particularly if it was combined with the nationalisation of land and
the removal of planning restrictions which facilitate monopoly land
ownership, then, not only could thousands of building workers be
provided with employment, not only would it stimulate demand for
building materials, but also the supply of new housing would act to
burst the existing property bubble. The consequent reduction in
housing costs for workers would reduce the Value of Labour Power,
enhancing relative Surplus Value and competitiveness. Even in
capitalist terms this would be a sensible course of action.
By the same token, the
ability to create credit money in this way would provide the funds
required for the kinds of programme previously outlined for new
infrastructural investment. Nor would such an approach lead to a
“crowding out” of private sector borrowers. The problem at the
moment is that not only do banks not want to lend to individuals and
small companies, for fear of not getting their money back, but
individuals are trying to reduce borrowing, whilst the majority of
small firms that want to borrow need to do so to stay float, not to
finance any major viable expansion. At the same time, large
companies on balance, have plenty of cash, and can in any case borrow
themselves directly in the Bond Markets at very low rates.
Microsoft, despite having $40 billion of cash on its Balance sheet,
last year borrowed another huge amount, simply because it could do
so, for a long period, at just 3%! A Government borrowing from its
own nationalised bank to finance its own investments would not have
to fear not paying itself back.
Providing the credit
money the Government created by such means went to stimulate
investment and increase economic activity and competitiveness, it is
possible to proceed on this basis without without control of the
Central Bank printing press. Provided the increased economic
activity resulted in rising deposits and an expansion of the Bank's
Balance Sheet related to real assets then no bubble is created. A
requirement for that is that money does not flow out of the economy
i.e. the additional money does not become deposits in foreign banks.
Herein lies the danger
with the application of Keynesian solutions on the basis of the
existing nation state. It leads towards a nationalistic solution.
That is why Marxists would not advocate any such solution. However,
that is not to say that such a Keynesian solution on a European, or
preferably an even wider international basis would not be possible,
and under those conditions there is no reason that Marxists would
oppose it. But, even on the basis of the current nation states, in a
revolutionary situation with a Workers Government in place, there is
no reason that such an approach should be opposed. With workers
increasingly taking hold of the means of production under those
conditions, then Marxists would clearly defend them against foreign
and domestic Capital, in the same way that Lenin and the Bolsheviks
became defencists as soon as they took power from the bourgeoisie and
its State. Of course, such actions on a national basis by a Workers
Government are subject to all the provisos that Marxists make in
relation to “Socialism In One Country”, let alone State
Capitalism in One Country.
Marxists would press
an Hollande Government and certainly a Workers Government in Europe
to seek to generalise that approach across the Eurozone, and then
Europe as a whole. To be fair, Hollande has hinted at such a
strategy, and there are indications from Social Democrats in
Portugal, Spain, Germany, and Greece that such a struggle is
possible. Even the technocrats such as Monti, and Draghi, put in
charge of Italy, and the ECB are now pressurising Merkel to change
course, in favour of closer Eurozone integration, the
collectivisation of the debt, the establishment of Eurobonds etc.
But, it would be folly
to suggest that a Hollande Government or a Workers Government should
not press forward on that basis, and should have to wait for workers
elsewhere in Europe to catch up. Even more ridiculous would be the
suggestion that advancing the position of French workers by enhancing
competitiveness would in some sense be a Nationalist solution.
Marxists are in favour of the development of the productive forces,
because it is a fundamental requirement for the building of
Socialism. The more that happens, even within a national framework,
the easier the transition to Socialism becomes. When the Bolsheviks
seized power in 1917, they did so with the perspective of encouraging
an international revolution. But, that perspective did not in any
way inhibit Lenin and Trotsky from advocating they press forward
immediately with modernising their own economy, improving its
efficiency and its competitiveness against the other economies. On
the contrary, the success in doing so, and enhancing the strength of
the workers can be an important tool in winning the support of
workers in other countries.
The Keynesian
alternative to those policies of austerity is not our policy. It
remains a Capitalist solution, which accepts the continuation of
capitalist exploitation. But, it is a more rationale solution. We
do not believe in Political Indifferentism, we choose the rational
solution as against the irrational, the solution which offers workers
the best conditions to advance their case, not that which threatens
to consign them to a period of severe economic decline.
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