The use of additional liquidity, or credit, as Marx describes, is an integral feature of capitalism, as a means of it going beyond the bounds imposed upon it. It enables production to continue to expand, and the consumption of that production to continue, even beyond the point where an actual condition of overproduction already exists. In conditions of partial overproduction that may enable a generalised crisis to be avoided, but where a generalised crisis of overproduction of capital exists, i.e. where capital has expanded relative to labour supply/the social working-day, so that neither absolute nor relative surplus value can be expanded further, this simply means that it results in the degree of overproduction being even greater than it would have been.
Credit is not the cause of the overproduction, or the cause of crises, as the Miseans believe, for example, in their theory of the crack-up boom, which some Marxist economists have adopted. Indeed, as Marx describes, credit is a powerful means of capital being able to expand, and will also be a powerful means by which the workers can expand their cooperatives and other forms of socialised capital.
“Without the factory system arising out of the capitalist mode of production there could have been no co-operative factories. Nor could these have developed without the credit system arising out of the same mode of production. The credit system is not only the principal basis for the gradual transformation of capitalist private enterprises into capitalist stock companies, but equally offers the means for the gradual extension of co-operative enterprises on a more or less national scale. The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other...
The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits ... This simply demonstrates the fact that the self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market... At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production.
The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to a new mode of production. It is this ambiguous nature, which endows the principal spokesmen of credit from Law to Isaac Péreire with the pleasant character mixture of swindler and prophet.”
(Capital III, Chapter 27)
And, of course, the printing of money tokens by central banks in the form of QE has been of this latter kind. It has had nothing to do with facilitating an increase in capital accumulation and production, but the very opposite, it has been about promoting speculation and gambling on financial and property markets so as to inflate asset prices; it has been about promoting the biggest Ponzi Scheme the world has ever seen, to that end.
So, in a period of long wave expansion, Keynesian fiscal intervention can foreshorten any recession resulting from the causes cited above. As the economy continues its expansion, the state spending can be recuperated in increased tax receipts, and the borrowing repaid. If the borrowing is financed by money printing, then, provided the expansion of output is at least proportional to the increase in liquidity, it need lead to no inflation. In the late 1970's I did an econometric study going back 200 years, examining increases in money supply against increases in prices, and the linear regression showed a high degree of correlation, on the basis of a two year lag between increased money supply, and increased prices.
So, another factor, here, is the nature of the state spending. This again shows the importance of Marx's analysis of the rate of turnover of capital, and Bukharin's analysis of the Economics of the Transition Period, in which he looks at its significance in terms of industrialisation and development. If state spending is on short term projects that quickly put value back into the economy, then value increases, and can absorb the increased liquidity. However, if it is spent on very large, long-term projects, value is sucked out of the economy, without a corresponding value being put back into circulation, until much later. Paying for such spending by money printing, as was the case with the Stalinists, is then highly inflationary, as well as reducing the annual rate of profit of the economy, and limiting the potential for capital accumulation. This can lead to what Bukharin called “expanded negative reproduction”.
“Undue emphasis upon longer term projects which have a considerable time-lag before they become productive could have the temporary effect of contracting total productive output. There seems to be some evidence of this actually happening during the first five year plan in the Soviet Union.”
(Bukharin on the Economics of the Transition Period, by Ken Tarbuck, in Permanent Revolution 3,Summer 1975, p 32)
However, fiscal expansion at times when there are no unused or underused resources simply means that competition for available resources increases their market prices. Increased borrowing to finance state spending also acts to increase demand for loanable money-capital causing interest rates to rise, which means that profit of enterprise is squeezed, reducing the money-capital available for capital accumulation, and so reducing the rate of growth. State spending for unproductive purposes such as arms spending, or to cover consumption – such as the furlough scheme or to cover unemployment and other welfare benefits – puts no additional value into the economy, and represents a pure drain from surplus value, reducing profits available for capital accumulation, thereby reducing growth, and so increasing unemployment, and the amount of underutilised resources.
“In developing this concept Bukharin was directly challenging the 'truly monstrous theoretical construction that drew the conclusions about the beneficial (!) influence of war on 'national economic life...' By implication he was also challenging the view of Rosa Luxembourg (and all those who have since followed her) in her assumption that armaments were a field for the accumulation of capital. He argues that 'war production has an altogether different significance; a gun does not become transformed into an element of a new productive cycle; gunpowder is shot into the air and does not crop up in a different guise in the next cycle at all.' Pointing out that when arms production and war reaches a certain point, when larger and larger quantities of materials and labour-power are sucked into this process, it will begin to destroy the very basis of production itself. Thus 'what we have here is not expanded reproduction, but an ever increasing under production. Such a process can be designated expanded negative reproduction.' Under-production here refers to the under-production of capital as well as of commodities.”
(ibid, p 23)
This indeed was also another feature of the Stalinist states which developed as huge welfare states, in which large amounts of state spending went to cover this unproductive consumption, which continually undermined the growth of capital, and led to underproduction. This was exacerbated by the attempt of the Stalinists to drive growth by diverting resources away from the production of consumption goods into heavy industry, creating an inevitable disproportion between Department I and Department II.
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