Capitalist Crisis or Crisis of Neo-Liberalism?

22 Jan

Karl Marx

John Maynard Keynes

At a recent meeting of the Independent Socialist Network, which is a new grouping of independent socialists affiliated to TUSC (the Trade Unionist and Socialist Coalition), there was the beginning of an important discussion on the nature of the economic crisis that we are now living through.

Specifically, in the context of a discussion on how we can hope to achieve unity on the socialist left and the creation of a new socialist movement, there was some discussion on what kind of economic analysis socialists should be putting forward, and why the left currently appears so ideologically on the defensive despite the major blows that have been inflicted by events on the previously dominant free-market ideology by the credit crunch and the serious capitalist crisis we are currently still embroiled in.

This article will sketch out some ideas based on my view of this discussion and the issues it raised. It does not claim to be a summary of this debate, which in any case is an ongoing process, but rather I hope it will play some role in furthering discussion about economics both in the ISN and on the wider left.

Keynesian economics

Much of what passes for economics on the left today, including the far left, is basically Keynesian. That is, it seeks to use the capitalist state as a means of ameliorating capitalist economic crises through counter-cyclical state spending. Periodic capitalist crises, Keynsians and Marxists agree, are inevitable as the capitalist economic cycle is not merely a random happening, but something regular and built into the economic system itself. The classical Keynesian theory, in a nutshell, is that states should ideally take care to build up a budget surplus in periods of boom, so that in periods of contraction they can use those funds to give an economic stimulus and thus generate economic growth, thereby causing the economy to ‘jump-start’.

In less than ideal situations like the present one in which debts and deficits abound, Keynesianism likewise prescribes a significant degree of borrowing in order to procure the means for a stimulus through state spending and investment, on the basis that the increased debt will be offset by the resumption of economic growth, generating sufficient tax receipts to pay back outstanding debts – and indeed temporarily increased debts – than would be possible if such a financial/investment stimulus were not applied.

In order to be viable, however, this stratagem depends on a realistic prospect that the stimulus will be successful sufficiently to create the necessary growth. This means that the economy must be seen has having sufficient latent or untapped economic potential. Otherwise the loans simply will not be forthcoming; prospective lenders will simply invest their spare capital elsewhere. So ultimately this Keynesian strategy also depends on the profit motive for its success; we are not talking about a break with capitalism at all, but simply an alternative  mode of operation of capitalism, which is thereby subject to the same basic contradictions that affects the capitalist mode of production itself.

Much of the debate in bourgeois economics recently has been about the possibility or otherwise of implementing a Keynesian strategy in the current crisis/recession, as many of the older capitalist countries are deeply mired in debt as a result of bailing out the financial system and also the collapse of growth caused by the crisis, which was the most serious for the past 60 years. In the last years of the Brown and Bush administrations in the Anglo-Saxon countries, there was a temporary turn to Keynesian stimulus, and a major bank bailout and partial nationalisation of failing banks, to stave off the danger of financial collapse in the aftermath of the destruction of Lehman Brothers in particular.

This is a particularly acute debate because of the debt crisis and the depressive effect of debt overhang and high budget deficits on economies across Europe and of course the US. There appears to be kind of double trap for bourgeois economics in trying to get out of this mess: on the one hand, to cut the budget deficits, which are not about absolute debt per se but rather the rate of growth of those debts, austerity seems to be the appropriate prescription. On the other hand, austerity is showing in practice in a number of countries that it leads again to a collapse in growth, and therefore to the need for more borrowing to prop up economies.

This has created a major economic depression in a number of European countries: Spain, Portugal, Ireland and of course Greece are really at the sharp end – the shock treatment being inflicted on Greece in particular to keep it within the Euro and drive down its deficit is on a level comparable to the economic collapse in Germany after 1929, which everyone knows had tragic and world-shattering consequences. Who knows where Greece’s seemingly bottomless austerity will lead – probably towards exit from the Euro and some kind of negotiated default, but there are more catastrophic possibilities.

In most European countries and the US it is not as severe as that, but even so, such phenomena as the US Tea Party and the renewed vigour of the French Front National under the younger Le Pen appear to reflect a reactionary, despairing response to severe economic recession by some sections of the population, including part of the working class in those countries.

International relationships

There are several interlocking problems that beset the older, advanced capitalist countries that have been caught up in the aftermath of the economic crisis that began in August 2007 and which still blights the world nearly five years later, and which render both the recent neo-liberal orthodoxy, itself a recrudescence of pre-Keynesian ‘neo-classical’ economics, and Keynesianism itself, problematic in today’s world. One important material factor is relative decline of the older capitalist powers such as the US and the European powers, and the rise of capitalism in China and on the horizon other major potential competitors such as India or Brazil.

The internationalisation of the world productive forces, that has reached a scale completely beyond the imaginations of earlier generations, is another related factor. The fact that so much industrial production has migrated from countries like the United States and Britain to places like China, which is now enjoying a dizzying rate of economic growth from rapid industrialisation and is filling that gap, makes earlier strategies for dealing with severe recession: national reformism and borrowing against the future to stimulate an economy, problematic. This appears to be a much more risky course of action when the industrial base that previously would have backed it up has dwindled.

Keynesianism, at least as implemented in its heyday, though after Keynes himself had died, in the 1950s and 1960s, still depended very much on a small number of  very powerful national economies with a monopolistic position in the world economy. It is arguable that the entire Keynesian era, with its two whole decades of economic boom in the 1950s and 1960s, was not the result of Keynes’ economic prescriptions per se, but rather that they reflected an historic moment when US economic hegemony made such world economic management a fleeting material possibility.

This was the result of an unprecedented situation as the previously relatively cocooned and semi-isolationist US emerged as the overwhelming victor, in economic terms, of the Second World War. It defeated not only German and Japanese imperialism, but also benefited enormously from the terminal crises of the massive British and French colonial empires, which had been mortally damaged also in the course of the conflict with the Axis powers and by the uprising of the colonial peoples that was fuelled by the inter-imperialist conflict.

This incredible opening up of large, previously fairly closed sections of the world to American economic influence and power, a power that had been previously fairly constrained by geography and the relative lateness of its emergence as an imperial power, produced a really gargantuan economic expansion of American capitalism that took the rest of the advanced capitalist world along with it and produced the ‘Golden Age’ of the 1950s and 1960s. That was the material basis for Keynesian economics to establish a temporary hegemony.

This long expansion of capitalism was not the result of Keynesian economics, but was rather a phase of capitalist expansion that can only be understood by looking at the relations of forces between imperialist powers, which is a major factor in either facilitating prolonged economic expansion or conversely, economic decline.

A similarly deep-going, but shorter period of prolonged economic expansion occurred between the beginning of the twentieth century and the outbreak of war in 1914. Its context was the ‘armed peace’ in Europe when the colonial powers almost exactly balanced each other. It then turned into its opposite: a decades long period of economic instability and deadly imperialist rivalry that was only finally resolved by the outcome of World War Two.

It is at least arguable that the breakdown of Keynesian ideology and authority in the mid-1970s was a result of the end of absolute US hegemony, the ideological counterpart of the breakdown of the Bretton Woods system in 1971 when US economic power, undermined by the Vietnam war among other things, meant the US had to recognise that in reality is was no longer strong enough to act as the sole anchor for the world monetary system.

That was the period of the decline of US power to the status of ‘first among equals’ from total capitalist hegemony, and the birth of the prolonged period of periodic, increasingly severe economic convulsions and instability we are living through today.

Causes vs consequences

The capitalist ruling classes abandoned Keynesianism as an economic strategy (while holding aspects of it in reserve for emergency situations like the 2007-09 credit crunch), because it was useless to it for restoring profitability that went into gradual decline in the late 1960s, accelerating in the 1970s. It was not however Keynesian policies that caused this decline, as many neo-liberal bourgeois economists assert, but the deep-seated contradictions of capital itself, centrally the tendency of the rate of profit to decline as the productive forces become more capital-intensive.

That perception was the reason for the embrace by the world’s ruling classes of the neo-liberal strategy of restoring profitability through privatisation and aggressive attacks on the social gains and organisations of the working class. And indeed, neo-liberalism for a whole period appeared to restore profitability and give the capitalist system a whole new lease of life.

For obvious reasons, since a redistribution of wealth from labour back to capital could only raise profitability and result in a considerable period of economic expansion and enrichment of the capitalists. The problem is that this does not, any more than Keynesianism, solve the basic contradictions of capitalism: the tendency to long term decline in the rate of profit, the ongoing economic cycle of creation and destruction of value, the drive to predatory wars of conquest for resources to offset this kind of decline, the spilling of production over national boundaries at the same time as capital is dependent on national states for its ultimate defence against hostile interests, etc. etc.

Thirty years of neo-liberalism have now given birth to a major capitalist crisis, of a similar systemic nature to the crisis of the 1970s that seemingly marked the death of Keynesian economics. The two crises are directly comparable events, illustrating really that while Keynesianism and neo-liberalism are complementary tactical options for capital in trying to wish away the basic contradictions of their system, in the final analysis neither of them are able to abolish those contradictions, which can only be done by abolishing the system itself.

In this regard, a key weakness of the socialist left today is the deference to Keynesianism, and the failure as a result to advance distinctively socialist solutions to the capitalist crisis. It is well known among thinking people, including many working class militants, that Keynesianism already failed. So Keynesian arguments do not exactly inspire legions of devoted followers these days.

On the other hand, there is a widespread belief that socialist economic solutions, conscious, democratic planning of an economy for human need not profit, failed in the former Soviet bloc countries, so genuine socialist ideas on economics do not inspire such legions either. However, since this belief is actually a complete myth. It is an obligation of socialists to cut through this myth, not hide behind Keynesian social democracy, which is not socialist, and duck the hard arguments in defence of socialist economic ideas which ultimately provide the only coherent alternative to capitalism.

Need for socialist solutions

The remainder of this article will address some aspects of this. Many people today, even some in the bourgeois media, pay lip-service to Marx and his critique of capitalism in the context of today’s economic crisis without, however, elaborating on the real implications of this. Marx is thus turned into another political icon, someone who made predictions about the flaws of the current economic system, and its ultimate downfall, which is an accurate enough portrayal of his negative critique.

But what of the positive socialist alternative, in terms of economics, to capitalism? We hear little about this, except for the assertion that ‘central planning’ was at the root of the collapse of the USSR and therefore represented the collapse of the socialist programme itself.

It is seldom remarked upon that when Marx wrote in the 19th century about the need to socialise production, he was not putting forward a programme for the modernisation of backward countries and the industrialisation of mainly agrarian societies. He was rather putting forward a perspective for transcending fully developed capitalism in the most advanced countries of his day. Yet pretty much all of what is portrayed as central planning in the history of the Soviet bloc countries involved the use of state-organised forced industrialisation of primarily backward, rural-dominated societies to develop a surplus and build up industrial development to compete with the advanced capitalist-imperialist countries industrially.

This was the primary purpose of so-called central planning in Stalinist Russia, in Mao’s China, and in most of the other cloned Stalinist states that emerged by a process of mimickry in the mid-20th century. Some of these emerged as a result of national liberation struggles of considerable intensity and world historic significance – Vietnam and Cuba spring to mind. But there was nothing specifically socialist about them, even though aspects of the bowdlerised ‘communist’ ideology that inspired them in some cases led to real social gains and elements of a welfare state for impoverished, oppressed former colonial peoples.

The Stalinist variant of state-organised production was used by modernising, nationalist elites in a number of backward countries as a nationalist weapon to carry out industrialisation in a manner parallel in some ways to the industrialisation of some European countries, most notably Germany under Bismarck, where the state drove the creation of a modern, capitalist society.

The fact that some of these radical nationalist layers immersed themselves in a kind of ‘communist’ ideology, and in many cases may have genuinely believed that what they were building was socialism, does not actually make this objectively true. In fact, so far removed was this ‘communism’ from Marx’s understand of the revolutionary, liberating role of the working class in remaking society on democratic, consciously planned foundations, that one variant of this ‘communism’, Maoism, spawned the ultimate anti-Marxist absurdity.

Pol Pot’s ‘Khmer Rouge’ attempted to build a form of ‘communism’ in Cambodia by emptying the cities and thereby destroying the small working class, forcing the entire population to effectively become rural slaves in a attempt to take Cambodian society back to ‘Year Zero’ and start all over again. Over a million people were brutally killed as a result of this piece of nihilistic, anti-Marxist petty-bourgeois utopianism. Yet because these deranged, xenophobic, nationalist utopians laboured under the delusion that they were communists, even this ultimate anti-Marxist absurdity is from time to time wheeled out as a horrible example of what ‘socialism’ means.

Socialist planning has nothing in common with such things. It is only possible on the basis of a development of the productive forces so that the majority of the population lives in a predominantly urban environment, and can meet, discuss, vote, elect representatives empowered to organise and plan economic life, and hold them to account in regular elections. It is in fact the simple extension of democracy to the economic sphere.

The modern capitalist economy is dominated by monopolies that concentrate enormous economic power in their hands, without any election of the people who wield that power. These monopolies, in the era of globalisation particularly, span the entire world, and can undermine the policy-making of elected national governments without the slightest element of democratic authority themselves.

Socialist planning means that anyone who exercises economic power needs to be elected by and accountable to the those who are affected by the exercise of that economic power. Not elected by shareholders, as in the current fad for ‘responsible capitalism’ being pushed by Cameron, Clegg and Miliband today, but by the entire population affected by such economic decision making.

If monopolies, and the productive forces they command, cross national borders, then democracy and democratic planning must also cross national borders, and must become international economic democracy, or more accurately international socialist democracy or working class democracy.

Of course, if it remained at that level, the idea of democratic control of corporations, including trans-national corporations, you would be talking about another kind of utopia. In order to transform such corporate bodies into genuinely democratic bodies, they would have to cease to be private corporations and become arms of economic democracy from below.

And in many cases, economic rationality and the need to avoid waste and duplication would sooner or later require such bodies to be merged. This would involve a whole new sphere of democratic administration, and a learning curve of public administration involving mobilising the experience and expertise of diverse layers of the working population with different occupational experiences, and the collaboration of workers across national borders somewhat shadowing what happens now among the management of transnational companies.

One important recent technological development that makes democratic planning enormously easier to implement is the internet and the web. As part of making planning issues available to as much of the population as possible, and drawing in many people, issues for decision, and the data that needs to be used to take such planning decisions, could be posted on line for examination by the public, allowing public debate by people with all kinds of experience of the issues being addressed.

Thus combining both the enormous processing power of modern computing with the mobilising the insights of large numbers of experienced workers in a wide variety of fields, this has the potential for an enormously dynamic, expanding economically democratic form of political economy. This could easily equal or surpass the famed dynamism of the market without the chronic waste and irrationality that goes with that so-called ‘hidden hand’  – which in reality is a manifestation of the subordination of human beings to the process of production, when for the sake of civilised development it should be the other way round.

All this presupposes of course a very different situation from the one we face now, a revived mass socialist movement based on Marxist principles and working class democracy. But in order to bring into being such a movement, we have to fight for genuinely socialist positions in the sphere of ideas, and that includes economics.

Indeed, it is especially in the sphere of economics that work needs to be done, we are in the curious situation where two major schools of bourgeois economics – neo-liberalism and Keynesianism – have both within living memory been discredited by major crises in situations when they consecutively dominated economic thinking. And yet socialist ideas are hardly ever heard or elaborated on. Hopefully this article will be some contribution to changing that, and will encourage others to think about and elaborate on the same themes.


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3 responses to “Capitalist Crisis or Crisis of Neo-Liberalism?

  1. Coventarian

    February 21, 2012 at 12:27 pm

    Having being exposed to current debates in bourgeois economics, I’m a little surprised that you defined Keynesianism as “seek(ing) to use the capitalist state as a means of ameliorating capitalist economic crises through counter-cyclical state spending”.

    As the wikipedia entry on Keynesian economics puts it “Keynesian economics […] advocates […] monetary policy actions […] AND fiscal policy actions.”. Perhaps the monetary policy side of Keynesianism is overlooked as it’s not currently politically controversial; interest rates have been lowered as much as they will go and a number of states are implementing Quantative Easing, with no significant effect.

    It’s necessary to consider both sides of Keynesianism in order to see its fundamental characteristics. Otherwise the discourse narrows to the debate between the hawks and doves on public spending.

    In my humble opinion the core of Keynesianism is the idea that the state should respond to a glut of surplus value by stimulating borrowing. The state encourages private sector borrowing by lowering interest rates, Quantitative Easing or administrative means (e.g. requiring nationalised banks to lend more). Public sector borrowing is of course under the state’s direct control. The suitability of Capitalism or the Market for running the economy is not questioned by Keynesianism, it just proposes that Capitalism be given a little nudge when it gets stuck

    Some of the evident problems with stimulating borrowing include asset bubbles such as in residential housing (private sector borrowing) and wasteful public sector spending (e.g. white elephant infrastructure projects or creating incentives which undermine individual employability). There’s also a solvency problem – can the state/consumers service their debts indefinitely?

    I suspect the most important group of people defining Keynesian economics as “a justification for counter-cyclical state spending” are people trying defend jobs in the public sector whilst longing for the buoyant private sector employment conditions of the post-war boom. They assume that government policy was a major factor in creating the post-war boom.

    In my humble opinion the major factors causing the post-war boom were the massive destruction of physical capital in the Second World War and the implementation of technologies developed in the 1930’s and 1940’s. These technologies weren’t implemented when they were developed due to financial conditions in the 1930’s and the direction of all efforts to military objectives in the 1940’s. So from 1950 to 1970, productive investment was a “no brainer”; all that had to be done was to replace old-moded techniques and wrecked or obsolescent physical capital and with their modern alternatives. Once this catch-up process had been completed, an increasing proportion of surplus value was diverted into schemes which didn’t provide employment. Attempts by government to overcome the problem by increased private and public sector borrowing stimulated inflation rather than employment.

    So we are back to 19C boom/bust cycles and a considerable army of reserve labour.

  2. redscribe

    February 22, 2012 at 11:06 am

    ” The suitability of Capitalism or the Market for running the economy is not questioned by Keynesianism, it just proposes that Capitalism be given a little nudge when it gets stuck”

    I agree with this point, that is the main point of my article in fact. This commenter is right that I did not address monetary loosening – injecting new money into the economy simply through creating more. It does seem to me to be of a lesser importance to actual borrowing, and indeed may not achieve its objectives if it is intended to indirectly simulate lending by banks. Here they just seem to take the money and carry on as before, though it may have acted as a cushion in preventing credit drying up even more. In the US, where a significant borrowing/stimulus has taken place, ‘quantitative easing’ is obviously secondary to that and probably explains the upturn in the economy there.

    In my humble opinion the major factors causing the post-war boom were the massive destruction of physical capital in the Second World War and the implementation of technologies developed in the 1930′s and 1940′s

    This is true, But I would venture that the indispensable condition for this was US hegemony, and the overcoming of the fragmentation of world capitalism in the inter-war period. Without that political precondition, the economic process of implementation of what some called the ‘third technological revolution’ would have been much more problematic. One key point that I was trying to get over in my article is that such long capitalist upturns (or downturns) are not purely or even mainly an ‘economic’ process, divorced from political conditions, but are rather overlaid by the context of political developments. Of course these political developments are themselves products of needs – economic and extra-economic, of the various capitalist ruling classes, but ultimately, economics is subordinated to politics to a considerable extent even under capitalism. The subordination of the market, and its supposedly blind, automatic mechanisms to conscious control and management thus is not something outlandish or unnatural, as the current wisdom would have it, but entirely natural and feasible.

  3. Coventarian

    February 25, 2012 at 2:01 pm

    In my earlier comment, I overlooked the main thing that Quantitative Easing is currently doing; it keeps long term interest rates low. This doesn’t seem to have much of a stimulus effect, but it does lead those with defined contribution private/company pensions who are about to retire with much lower pensions than they expected.

    Currently the money created by Quantitative Easing is used to buy government and corporate bonds. As an alternative the Green Party proposes that it should be used to finance green infrastructure projects, such as renewable energy and improved house insulation.

    A variant on the same idea would be to use the Quantitative Easing money to finance build-to-let social housing projects. Build-to-let would provide useful work to construction workers, put downward pressure on rents and allow workers to move home more easily.

    This doesn’t require the state to borrow money and I don’t see how these measures could be inflationary.


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