Theories of Surplus Value, Part II, Chapter 17 - Part 37

Whilst Ricardo's followers sought salvation in the separation of the overproduction of commodities from the over abundance of capital, others attempted to explain crises as arising from credit. This same explanation for crises was provided by Von Mises, and his supporters, back in the 1930's, with the theory of the crack up boom. Whereas monetarists like Milton Friedman, and his modern day apostles, such as Ben Bernanke, explain the 1930's Depression as arising from too tight monetary policy, by the Federal Reserve, the Miseans explain it by too lax monetary policy by central banks. These right-wing economic schools are thereby enabled to blame capitalist crises not on any inherent characteristic of capitalism, but by the intervention of the state, via the central bank in the operation of the market. 

For the Miseans, the state intervention leads to malinvestment. The economy is overheated; as this speculation runs into financial markets, the malinvestment leads to company failures, and financial panics; the whole thing falls apart like a house of cards. What the Miseans did was effectively to take one aspect of Marx's analysis of crises, that in relation to credit, and turn it into the sole factor responsible. That fits with the Misean free market ideology, because it means the responsibility for the crisis is removed from within the system itself, and placed at the door of a meddling state, whose central bank artificially dictates interest rates, and over stimulates credit. The supporters of this theory today, therefore, call for the Federal Reserve to be scrapped so that only the market determines the rate of interest, and provision of credit. They also generally argue for a return of some kind of gold standard. 

Echoes of this approach can also be found amongst some Marxists, as an explanation of crises. Its not so much that the description of the role of credit is wrong, but that the significance given to it, as an explanation of economic crises, of crises of overproduction is unjustified. 

As Marx explains, in every crisis of overproduction, a money crisis always appears as a secondary phenomenon, but were there not an overproduction of capital and of commodities, then credit could not cause it. Credit simply acts to disguise such overproduction and enable it thereby to continue for longer, before the crisis erupts. And, yes, actions by central banks, for example via QE, to inflate asset prices, can create conditions of malinvestment, and more particularly engender speculation as opposed to investment, which, at some point, break out into financial crises, such as those referenced earlier, and indeed, which I anticipate we will see on an enormous scale in the near future, but these are financial crises, not crises of overproduction. They are crises such as that in 1847, 1857, and 2008, which can run over into serious effects on the real economy. 

But, to explain the regular crises of overproduction on the basis of credit is as wrong as was Ricardo's explanation on the basis of isolated events. 

“Later historical phenomena, especially the almost regular periodicity of crises on the world market, no longer permitted Ricardo’s successors to deny the facts or to interpret them as accidental. Instead—apart from those who explain everything by credit, but then have to admit that they themselves are forced to presuppose the over-abundance of capital—they invented the nice distinction between over-abundance of capital and overproduction. Against the latter, they arm themselves with the phrases and good reasons used by Ricardo and Adam Smith, while by means of the over-abundance of capital they attempt to explain phenomena that they are otherwise unable to explain.” (p 498) 

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