This long period in which Keynesian economics seemed to work, led to ideas about a crisis-free capitalism, which many on the Left, also, adopted at about the time that the conditions which made it possible came to an end. That was the period of the end of the long-wave uptrend around 1974, as a crisis of overproduction of capital set in. The indications of that had been apparent for some time, though are easier to see with hindsight. The more the 1960's progressed, the more it was clear that capital was expanding at a faster pace than the labour supply. All of the productivity gains from the previous Innovation Cycle, which peaked in 1935, and created large surplus populations, had waned. Capital accumulation, which was intensive during the 1940's and 50's, based on the application of that new technology, became extensive, thereby using up labour supplies at a faster pace. It was the other side of slowing productivity growth.
A feature discussed by Marx in Theories of Surplus Value, Chapter 21, became manifest. As capital accumulated extensively, and the demand for labour rose relative to its supply, workers not only demanded enhanced rates for overtime work, but also, began to demand shorter hours, and longer holidays etc., thereby, reducing the scope for expanding the social working-day, and absolute surplus-value. On the contrary, that began to fall, and was no longer compensated by rising levels of relative surplus-value from rising productivity. As capital competed for scarce labour, relative wages also rose, as Glyn & Sutcliffe described, leading to a squeeze on profits, which reaches a crescendo, and crisis of overproduction of capital in the mid-70's. It was this, and the failure of both neoclassical and Keynesian economics to understand the difference between these two types of crisis (overproduction of commodities and overproduction of capital), as well as their failure to understand the difference between money and money-capital, which characterised the period between 1974 and 1987.
There is a commonality in the analysis of both the neoclassical/Austrian School economists and the Keynesian/post-Keynesian economists. It is the failure to understand the nature of money and of capital. The neoclassical/Austrian School economists believed that all that was required was to increase profits. That could be done by reducing wages, or reducing taxes, or interest rates. But, as previous similar periods showed, if their goal was to bring to an end a crisis of overproduction of commodities, and persistent stagnation of the economy, that would not work, basically for the reasons Sismondi had set out, and which Ricardo, Mill, Say et al had rejected.
Falling wages means that a large part of aggregate demand is undermined, and, although, in periods of frantic economic activity – booms – firms might use higher profits to invest in expansion speculatively, they do not do so in conditions of economic stagnation. Similarly, in such conditions, if the rate of interest is reduced by central banks with the intention of stimulating investment, it becomes, as Keynes noted, following also Marx's analysis set out in Capital III, like pushing on a piece of string. Nor does cutting aggregate demand by cutting state spending, so as to cut taxes work, in such conditions.
Firms rather than using increased profits for expansion, increase their holdings of money-capital. Of itself, this increase in the supply of money-capital from realised profits, relative to the demand for that money-capital for investment (investment/real capital accumulation not acquisition of fictitious-capital/speculation) causes interest rates to fall, and so causes asset prices to rise (capitalisation), which gives an incentive for such speculation. In previous long-wave cycles, such periods of stagnation, are also characterised by intensive rather than extensive capital accumulation.
For the Keynesians, they believed that if the state intervened, as it had done repeatedly after WWII, to stimulate aggregate demand, then, firms would respond to the rising demand, invest in new capital, and so the economy would rebound. The post-Keynesians, and supporters of MMT, basically see this operating not by the state raising taxes or borrowing, but by creating money out of thin air, by increasing liquidity, monetising the debt of the state used to expand the economy. They see this as no different to what the state did using QE, to bail-out the banks. The refrain being if the central banks could “print money” to bail out the bankers, why not to finance capital investment in infrastructure and so on. In the post-war period, when Keynesian state spending expanded massively, and huge amounts of infrastructure as well as welfare states were created, that is exactly what they did, just as similarly happened at the start of the Industrial Revolution. But, assuming that can happen now fails to understand the nature of capital, and the role of the capitalist state, including its central banks.
It also misunderstands what has happened in the last 40 years, in the developed western economies, in which the ruling-class has become characterised not just by its ownership of fictitious-capital (shares, bonds, derivatives) but by its reliance for its wealth and power on speculative gains on those assets, rather than on the revenues accruing to them, as interest/dividends. The scope for increased interest/dividends (and rents) is limited by the accumulation of industrial capital, and so on the expansion of surplus value/profit. In other words, if the rate of surplus value is constant, the mass of surplus value, out of which interest/dividends, as well as rents and taxes are paid can only increase if the mass of capital employed, itself increases. But, any increase in capital accumulation threatens rising interest rates, from still historically very low levels, and a consequent crash in asset prices.
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