Economics of the madhouse

Hillel Ticktin reviews: Paul Krugman' End this depression now!', Norton, New York, 2012, pp272, £14.99

Professor Paul Krugman - Nobel economics prize winner, Princeton academic, recipient of many awards and regular, twice-weekly columnist at The New York Times - has written a popular book explaining what in his view can be done to bring the current crisis to an end.

He is not wholly fetishised, like so many other economists, left or right, and he has declared the present downturn a depression and a slump, similar though not equal to the Great Depression. He is right - though one might quibble as to whether it is not another Great Depression - yet he does not draw radical conclusions from his diagnosis, as he should. He does, after all, support the market.

Paul Krugman is not a classical social democrat, who wants to extend welfare provision for the population, remove the restrictions on trade unions, introduce minimum-wage laws and then give workers more control over their enterprises. He is an explicit follower of Keynes, whom he declares to be a moderate conservative. He quotes some of his radical statements like that referring to the absurdity of the economy being run on the basis of a casino. He also quotes Keynes declaring that in the long run we are all dead, as an illustration of the mistake made by conservatives in arguing against short/medium-term measures to help the economy and provide benefits to workers. In a contemporary context Keynes’s remarks appear leftwing, but in the 20s and 30s he was trying to save the old order, albeit by making it more rational and more humane. Krugman seems to have the same objective.

The book itself is very readable, eschewing both jargon and too many statistics. Krugman explains all his terms and his book debunks most, if not all, of the current shibboleths of the right in some detail. He achieves his objective and the book is worth reading by the left - if only to brush up on everyday popular arguments against the right.

Treading carefully?

Keynes did his best to exorcise the ghost of Marx and Marxism. Although two years earlier Micha? Kalecki had written a book along the same lines as Keynes, but using Marxist political economy, Keynes did not refer to it. Furthermore, Keynes refused to acknowledge the writings of Marx and of Marxists who had theorised underconsumption. One argument has it that Keynes was simply ignorant of Marx’s and Marxists’ writing. That is simply unbelievable. It is far more likely that Keynes left out any references to the considerable body of Marxist literature which analysed crises because he knew that, had he not done so, he would have been ostracised and his books would have had no influence. There is no doubt that Keynes would have found Marxist literature impenetrable, given his orthodox economic training, but that does not mean that he would not have known many of the arguments first hand from people whom he met, like Evgeny Preobrazhensky, and from colleagues such as Piero Sraffa.

Krugman gives the impression that he is of the same ilk. He tells us that he changed his mind about Hyman Minsky’s work on debt and crisis. Minsky, he informs us, was marginalised in the economics profession, though he does not tell us why. Since Minsky was either a Marxist or not far from Marxism, depending on one’s outlook, one can draw one’s own conclusions. We live in a society where the left is effectively driven underground in the universities, in education, in the media, etc, and people have to conform to norms set from above. The Conservatives in the UK have complained that the BBC is too leftwing and a body has been set up to investigate the complaint. For anyone who actually is leftwing the BBC appears biased to the right and more biased to the right today than a few years ago. The situation is considerably worse in the USA, though through different structures.

So it is no surprise that Krugman is careful to avoid any reference to Marxist thought, socialist writing or a critique of the market. This, however, also means that one is not certain what he actually thinks. He is an orthodox economist of the post-war variety, so one might assume that he is, therefore, not just a supporter of the market, but an evangelist. However, people are changing and he makes it clear that he is also in the process of changing.

He has a critical chapter on the economics profession, pointing out how absurd the economists had been in denying the possibility of a depression/downturn - a denial which is still maintained. He is certainly not naive, yet he seems to see their viewpoint as an intellectual mistake, reinforced by a herd mentality. He also discusses the way rewards, in terms of appointments to lucrative jobs and prestigious positions, have provided a mechanism to influence opinion. Most people would take the next step and make a link with the ruling class and its needs. There is, however, no ruling class and no working class in Krugman’s account. Whether he is aware of them, rejects the concepts or wants to evade the de facto censorship in society is not clear.

Why the depression?

Krugman’s argument on the original cause of the downturn is simply that the controls imposed on banks and shadow banks in the 30s and 40s were removed from the 70s onwards. Greed did the rest. He describes the shift towards finance from the late 70s onwards, but the reasons he gives for that shift are weak. He also raises the issue of income redistribution towards the rich and powerful as part of the causation of the downturn.

Krugman sees a political aspect to this, but does not place it in historical context. He even says that income inequality ought to be reduced, but, on the other hand, that will take a long time. Those in control have increased their incomes at the expense of the majority, and he seems to accept the point being made by the Occupy movement that the one percent (or 0.001 percent) receive a disproportionate share of the added wealth in society. Logically, he ought to then accept that the one percent own or possess the same or even greater fraction of the wealth of modern society, and hence they hold power over the majority, whom they by and large employ, directly or indirectly. He makes it clear that he understands the nature of economic power and the corruption that goes with it. This is discussed further below.

There was indeed a clear move away from industry to finance capital in the late 70s, resulting in a decline in the growth rate, as well as a shift of jobs to China and elsewhere. In my view, it was a deliberate decision taken as a result of the class struggles in the 70s in the developed world. Its logic could only lead to limited industrial investment, a low growth rate and a surplus of funds to be invested. The result was an escalation of funds seeking investment, which combined with the favourable ideological environment to break the controls over banking and investment. However, the cause of the crisis does not lie in the nature of the growth of finance capital - that is only an epiphenomenon, in which the crisis took its most visible form. Given the increasing level of funds which could not be invested, the ever more frantic search for an outlet was bound to lead first to cannibalism and then bankruptcy.

For Krugman, the continuing problem lies in the failure to increase demand in order to provide a market for goods that would then be produced, and hence employ more people and increase their salaries, so leading to permanently increasing market demand. His methodology is resolutely empirical. In his postscript he provides a description of some of the studies involved. They show, for instance, that war leads to an increase in output or GDP. In other words, state expenditure does lead to an overall increase in growth. Logically, the reverse is also true - that cuts in government expenditure lead to more than proportionate decline in growth. He points to the empirical evidence: this is all detailed proof that the rightwing argument that government expenditure crowds out the private sector, so leading to a decline in overall output or at best no change, is simply wrong.

He discusses elsewhere the question of deficits, pointing out that they have been a feature of modern economies for centuries. Indeed, as we know in the UK, the government deficit has been a necessary part of the capitalist economy from the 17th century onwards. The present-day deficit has been exceeded a number of times, even if that deficit is much larger proportionately than in most other countries. In short, the deficit can be increased and it is not paradoxical that more borrowing leads to growth and so to less borrowing.

Like his mentor, Keynes, Krugman does not face the enemy directly by pointing out that government expenditure produces wealth as much as the private sector. Hence if government expenditure does not lead to growth because the private sector refuses to invest, the fault lies with the capitalist class. Furthermore, there is every reason to believe that the capitalist class can go on strike if it thinks that capital is threatened. The Socialist Party - the former Militant group - does argue that capital has been on strike for some time. On the other hand, Marxists argue that sectors which are based primarily on use-value are unproductive of value, though not of wealth. In effect, the right has been showing how correct Marx was to take his lead from Adam Smith, who strongly maintained that only those activities that contribute to accumulation are productive in capitalism. In other words, the crucial test is whether the activity produces profits, which can be reinvested.

Contemporary capitalism has blurred the lines and the issue is not quite so simple, since a nationalised industry can work on the basis of profits. Clearly military expenditure is not itself profit-making, though the private firms involved may be making profits. As it was military expenditure which was crucial in bringing the world out of the Great Depression, according to Krugman, and later military expenditure was also important in maintaining stability, one might have thought that would have led to a rather obvious conclusion: that wars and cold wars have been crucial to the stability of capitalism in the past century. He does not take the issue any further.

Why no indictment?

Why does Krugman not indict the ruling class? Since he is no fool, one must assume that there are three possibilities: (1) he is concealing his viewpoint; (2) he has some counter-argument not expressed; or (3) he is unable to go beyond the logic of orthodox economics. To do so he would have to reject the latter’s theory of price, based as it is on the tautology of price determining price, and turn to the labour theory of value. Keynes, of course, did use labour time at one point in his argument, but did not extend his line of reasoning. It is most likely a combination of all three reasons.

There is one further step which he would have to take, however. He would have to reject the view that there are a large number of independent investors out there (somewhere) who determine modern market growth, in favour of a view which says that there are a predominant circle of financial bureaucrats and capitalists. When there is any discussion over the deficit, the right says that if nothing is done investors will sell their stocks, or refuse to invest, so leading to a rise in interest rates or worse, and ultimately to national bankruptcy. Krugman argues that this view is wrong because investors have not done so in the case of the USA or UK. It is, according to him, correct in relation to the beleaguered southern European countries, but only because they do not have their own currencies. Empirically, in other words, the right is wrong on this issue, and Krugman is right. That is true. But we have to ask who are these investors. It is not the 99%.

It is true that the pension funds to which some of the 99% are contributing are part of the investors, but the pensioners have no say over the investment choices involved. Likewise with insurance company funds. Those who do decide are part of the one percent, whether they are bureaucrats or capitalists. He quotes the example of Bill Gross of Pimco, the largest bond-holding firm in the world, controlling well over $1 trillion in bonds, who declared British bonds toxic and said he was moving Pimco funds away from US treasury bills. Of course, there are some number of ‘middle class’ people who play the market, but they are not sufficiently wealthy either singly or collectively to determine the direction of the stock and bond markets. He rightly makes fun of the rating agencies who downgraded a number of countries, such as Japan and the USA, without any effect. The bulk of the funds sloshing around the world are either determined by the very wealthy, as in private equity, or by high-income groups of individuals who control institutional funds of different kinds. At one time, there was much talk of monopoly/oligopoly in orthodox economics. The word ‘competition’ is used, today, even when there are only two or three firms in a given industry. In reality, we know that competition is explicitly or tacitly limited.

However, the $100-200 trillion in the hands of the ruling class seeking investment or re-investment each year is now a permanent feature of the global economy, as long as it is capitalist. Banks and shadow banks are essential to their circulation. A move back to industrial expansion to provide for infrastructure, housing, etc, and the removal of greenhouse gases would reduce the size of these funds seeking investment, but all that is clearly unlikely, so the world economy is doomed to see the continuation of what amounts to rogue finance capital and stagnation. If ever the world was crying out for rational organisation and administration of global resources in the interests of the majority, it is today - but that is precisely why the ruling class needs austerity.

Austerity and power

One cannot expect a professor from Princeton University to start talking of a ruling class - not just because it would ostracise him from polite society, as it were, but because his whole training would teach him that such terms reek of conspiracy, lack empirical proof and belong to an underclass of ‘losers’.

That does not mean that he has no understanding of how the society is run. He makes it clear that he is very much aware how those in authority impose their will on the rest, including a long quote from Keynes which discusses the issue of Say’s law. Keynes criticises Ricardo for using it and explains why such a nonsense could become the dominant viewpoint. (Marx, who is never quoted by either Keynes or Krugman talked, of course, of the “childish babbling of a Say, unworthy of a Ricardo”.) Keynes argued that “it afforded a measure of justification to the free activities of the individual capitalist” (p206). Krugman picks this up and says of the paragraph quoted: “… the part about how the economic doctrine that demands austerity rationalises social injustice and cruelty more broadly, and this recommends it to authority, rings especially true”.

I have said, in ‘Critique notes’, that austerity is a policy for which one can use the Greek proverb, ‘Whom the gods would destroy they first make mad’ and Krugman has recently said, before a committee of the House of Lords, that the current policy is indeed mad. However, this requires an explanation. It is all very well to understand that the capitalist class likes such a policy since it rationalises what it is doing, but he remains within the bounds of orthodox economics, which is a discipline ruled by precisely such an ideology, even if in a highly sophisticated and esoteric form. Although Krugman thinks that we need a less unequal distribution of income, he does not discuss or imply anything about the democratisation of the enterprise, or of the control of the whole economy from below. There is no reference to the need to plan the society in the interests of the whole population.

Since neither Keynes nor Krugman were naive, we have to assume that they did their best to adapt their ideas to what they thought was realistic. Keynes was openly contemptuous of the proletariat, but that does not mean that he either supported the aristocracy or the central capitalist class, however much he may have liked their company. It is more likely that Keynes and Krugman see themselves and their circles in the position of Plato’s philosopher kings - the kind of people who ought to rule because they have the true knowledge of statecraft. They represent, in other words, the intelligentsia or the educated ‘middle class’, whose views or interests may coincide at this time with a liberal wing of the bourgeoisie.

Failure of Keynesianism

The essential point, which Krugman either rejects or is afraid to raise, is that the ruling class cannot live with the full employment which obtained from 1940 to 1970. It will not, therefore, reflate. With the end of the cold war it does not have the basis for reflation or military Keynesianism. The Keynesian strategy of centralised investment in nationalised concerns like transport, electricity, communications, housing and welfare benefits was buttressed and underpinned by the vast expenditure and controls necessary for the cold war, supplemented by a series of hot wars. Without the latter, Keynesianism would not have worked.

The first great advantage of the cold war was that enormous sums could be wasted by a nationalised concern, the military sector, which in itself reinforced the dominant ideology, commodity fetishism, even though it was run by a centralised bureaucracy nominally under the political control of elected personnel. Whereas workers in the state sector outside of the military tended to support trade unions and leftwing parties, and pushed for greater democratisation of their industries, that could not be the case with the military. The USA was the dominant capitalist power and its stability was the key to world capitalist stability. The military sector was important in other European countries like the UK and France, but they also had the other nationalised industries, as mentioned above.

The second great advantage of the cold war was the fact that Stalinism provided ideological benefit to capital, in its economic failure and political atomisation. Since the USA has such a large number of former citizens of the USSR and eastern Europe, they tended to support the predominant anti-communism to the point of rejecting any substantial form of social democracy or welfare state. They provided a kind of living proof to the rest of the US population of the evils of Stalinism and - by extension - of socialism.

The cold war also forced the bourgeoisie to adopt a united political and economic strategy for capitalism, whether consciously or unconsciously.

In the absence of the cold war, a genuine Keynesian reflation with full employment, economic management of the economy and proto-planning, forms of which existed after 1945, cannot be run without the working class being greatly strengthened. The two key elements of capitalist control - commodity fetishism and the reserve army of labour - would be either abolished or greatly weakened. For that reason, the bourgeoisie is afraid to introduce Keynesianism. In effect, the bourgeoisie is split between repression and those who are prepared to take steps in a Keynesian direction, hoping to maintain control or at least delay the overthrow of capital. This is where Krugman effectively stands.

If one looks back at the last century since the October revolution, then such delaying tactics have been successful (mixed, it is true, with more draconian measures). The alternative - now expressed by most conservative parties the world over, with the German Christian Democrats, the US Republicans and the British Conservatives at the head - is to restore a pristine capitalism, in which commodity fetishism and the reserve army of labour are very largely restored to their status before World War I.

Both wings of the bourgeoisie are living in a dream world, since it is not possible to return capital to a stable form. War is ruled out, and the complete abolition of a welfare state, without unemployment insurance, pensions, disability assistance, etc would require the dismantling of democratic forms, with the franchise being limited to the rich, as some are now advocating. In addition, modern capitalism has advanced to the point where the market is a shadow of its original self, with monopoly/oligopoly being the norm and bureaucratic management under euphemistic names running the economy. Finance capital has imploded and its controls can no longer be used. The result, for the bourgeoisie, is stasis - there is no solution and the depression continues.

This is not to say that more liberal governments will not adopt some of the policies advocated by Krugman, but, as he makes clear, up to now Obama has refused to take up adequate measures or provide sufficient resources to deal with the issues. That is likely to be the case everywhere. Why, after all, risk reinvigorating the working class before their time, as it were?

How long it will be before the working class throws off the increased repression and its chains in general is not clear, but such a possibility is no longer an invisible goal.