KARL MARX, JOHN MILTON KEYNES & J A HOBSON - AND THE CRISIS OF CAPITALISM.
Is
it to the wrong ideas of economists or to the interests of the power-holders
that we should turn to explain the “Great Contraction” of 2008-2009? John
Maynard Keynes believed that the Great Depression
of 1929-32 was caused by the wrong theory of how the economy worked in the
minds of policy-makers – the remedy for which was to equip them with the right
theory. But this ignored one thing: that the reigning ideas are, more often
than not, the product of the dominant power structures. Economics, therefore, needs
to be supplemented by political economy – the study of how power affects the
choice of ideas and policies and the distribution of income; in short, Keynes
plus J A Hobson and Karl Marx. Keynes explained that it was uncertainty that
causes economies to crash. Hobson explained how unequal income distribution
makes crises more likely and recoveries more difficult. Marx explained that
this inequality is inherent in the power structure of the capitalist system.
All have their part to play in explaining the crisis and collapse of 2008. Let’s
consider first of all the case of the “closed” economy – what happens in an
economy without foreign trade.
THE CLOSED ECONOMY:
Keynes
never engaged properly with Marx, but he saw some similarity between his views
and Hobson’s because Hobson, as Keynes did, challenged the core classical
belief that saving is always good. Where Hobson went wrong, Keynes suggested,
was in identifying overproduction as the worst consequence of excess saving.
For Keynes this was only a “secondary evil”; the primary evil was a propensity
to save, which was not realised in investment and production. According to
Keynes, Hobson’s theory was incomplete because he had no “independent theory of
the rate of interest”. In Keynes’s theory, the rate of interest (the rate that
banks charge for loans) is determined not by the volume of saving, as Hobson,
following the classical economists, believed, but by “liquidity preference” –
the desire, in situations of great uncertainty, to hold savings in liquid form,
chiefly cash. Thus the interest rate cannot be the price that keeps the desire
to save in equilibrium with the desire to invest: far from falling when people
decided to save more, the rate of interest might easily go up, as people
decided to hoard cash. Situations could thus arise when the expected rate of
profit fell below the minimum rate at which banks were willing to lend. “Over-saving”
thus went with “underinvestment”, not with “over-investment”. This speaks to the
present situation where, despite huge injections of liquidity by central banks,
commercial banks refuse to lend to customers, preferring to sit on piles of
cash. What, then, eliminates the excess saving and brings the economy back into
balance? Keynes suggested it was the fall in income. As economies get poorer,
the amount of saving falls to the level of the reduced investment. Thus
economies regain “equilibrium”, but it is an inferior equilibrium to the
previous one. This is a good approximation to the current state of Britain,
with no clear tendency for a shrunken economy either to grow or to contract.
Keynes
was aware that a grossly unequal income distribution made it harder to maintain
full employment. The rich save more than the poor, so the more unequal the
distribution of income, the larger the gap to be filled by investment if the
economy is to reach full employment. At the same time, the richer that
societies are as a whole, the fewer new investment opportunities there will be.
Hence the problem of unemployment would get worse over time from both ends.
Underinvestment becomes a structural problem as wealth increases, because bona fide investment opportunities decline while the ratio of saving to income
rises. So, what should governments do to maintain full employment? Keynes
suggested that in the short and medium term a government should provide
sufficient public investment from loans, but in the longer run it should
redistribute wealth and income in favour of those with a higher propensity to
consume. This latter was in line with Hobson’s remedy for slumps, reached by a
different theoretical route. Keynes’s ultimate policy aim was to absorb some of
the unwanted surplus of saving in increased leisure. This would mark entry to
the “golden age” of capital abundance – the theme of his futuristic essay
“Economic Possibilities for Our Grandchildren”, published in 1930. A hundred
years hence, Keynes thought, both capital accumulation and consumption would
approach saturation. Marx, too, looked forward to this kind of utopia but he
denied that it could ever be achieved by capitalism. The capitalist class (and
the political apparatus it controlled) would never allow the scale of public
investment Keynes wanted – which it would deem inefficient and wasteful; nor
the measures of redistribution advocated by both Hobson and Keynes – which it
would condemn as weakening the incentive to save and work. As machines
increased the productivity of labour, and thus the possibility of shorter hours
of work, capitalists would force down real wages by raising unemployment, and
more generally by pauperising the mass of the population. Sooner or later this
would cause a revolution. It was socialism, not capitalism, that would inherit
the era of abundance. The ideas of the three thinkers all play out differently
when we introduce a foreign sector. Let us call this “globalisation”.
THE OPEN ECONOMY:
In
a closed economy – one without a foreign sector – it is excess saving,
according to Hobson, that causes periodic slumps. But an open economy provides
an alternative: the domestic saver can lend his savings abroad to develop new
markets. Hobson called the need to find a foreign vent for saving the “economic
taproot of imperialism”. This was taken up by Lenin to explain why capitalism
hadn’t collapsed on schedule. Faced with a falling rate of profit, capitalists
could restore their profits by opening up sources of exploitation abroad. Unfortunately,
this remedy – which both Hobson and Lenin called imperialism – only postponed
the evil day. The competitive drive to capture new markets and open up new
sources of exploitation would lead to wars between the leading powers for the
“division and redivision of the world”. Hobson thought the Boer war was a
precursor of a new type of capitalist war. Lenin interpreted the First World
War in the same terms. Keynes drew a similar conclusion to Hobson and Marx. “If
nations can learn to provide themselves with full employment by their domestic
policy,” he wrote in 1936, “there would be no longer a pressing motive why one
country need force its wares on another or repulse the offering of its
neighbour.” The contemporary value of the analysis of all three thinkers is
that it forces us to look more critically at the phenomenon of globalisation.
Is globalisation the consequence of a benign and normal search for higher
returns? Or is it an attempt to solve problems of underconsumption and
declining profitability in the capital-exporting countries which would
otherwise bring their economies crashing down? All three analyses are relevant
to this problem. Keynes was the least interventionist of the three. He thought
moderate globalisation was potentially beneficial but it needed to be
underpinned by monetary “rules of the game” which would prevent surplus
countries from “hoarding” their surpluses and thus impose austerity on the
debtor countries. In his International Clearing Union, which he proposed in
1941, the reserves of persistent creditor countries would be taxed and the
proceeds redistributed to the debtor countries. But no such mechanism was
established by the Bretton Woods Agreement of 1944, and the problem of
adjustment of trade balances between creditor and debtor countries plagues not
just the eurozone but US-China relations, threatening a descent into currency
wars and protectionism. The intuitions of Hobson and Lenin also speak to our
present situation. Hobson’s notion of a structural imbalance between production
and consumption, leading to “excess saving” that requires a foreign vent,
surely applies to China. Lenin’s idea that the export of capital is required to
overcome periodic crises of profitability in the advanced capitalist nations
helps explain the “offshoring” of manufacturing (and service) jobs to China and
east Asia.
TODAY'S "CRISIS OF CAPITALISM":
We
have gone in the opposite direction to Keynes’s, Hobson’s and Marx’s hopes,
pushing into a distant future the golden age of capital abundance. We are still
fixated on economic growth and have abandoned any attempt to control the level
or kind of investment. In order to make growth happen, we encourage more and
more consumption through advertising, while actively promoting inequality. And
instead of the state embarking on wasteful and unnecessary investment
programmes to keep people in jobs, we leave it to the financial sector to do
this, wasting the money of investors in order to enrich a tiny minority, while
most people fall ever deeper into debt. A structural analysis of how we got to
where we are should start with an account of how Keynesian ideas, which saw off
the Marxist challenge after the Second World War, were in turn dethroned by
neoliberalism in the 1970s, opening the way for the dominance of finance
capitalism. The political economies of the capitalist world between 1950 and
the 1970s brought about a balance of forces between capital, labour and
government. Economic policy was designed to achieve full employment, wages grew
with productivity, incomes were equalised through progressive taxation, and
international exchange was restricted. This configuration created a virtuous
circle of growth. This
was the Keynesian age. Keynes believed that the power of ideas – his ideas –
would be enough to kill off Marx permanently, but he never considered the
possibility that his own ideas might be at the mercy of changes in the power
structures of western societies. After 1980, the state proved unable to protect
the Keynesian revolution from the consequences of the continuing full
employment it guaranteed. Over time, full employment strengthened trade union
power; unions used their position to push wages ahead of productivity; wages
started to encroach on profits; inflation took hold as governments tried to
stay ahead of trade union demands. To end what had become a vicious spiral of
“stagflation”, the business class demanded lower taxes, freedom to export
capital, free trade and an end to the full employment commitment.
Two of the
countervailing powers, the unions and the state, were humbled, leaving capital
in control. This brought back the power system of the 19th century, brilliantly
analysed by Marx. The economics profession justified the shift back to an older
form of capitalism. The technical ammunition for the monetarist
counter-revolution was provided by Milton Friedman’s restatement of the
quantity theory of money, coupled with his assertion that in each economy there
existed a “natural” rate of unemployment, which could not be lowered, except
temporarily, by printing money. Friedrich
Hayek’s slow-burning Road to Serfdom, published in 1944, offered a
powerful political economy argument against state intervention in economic
life. There was also a revival of the Schumpeterian idea that the dynamism of
capitalism depended on bouts of creative destruction. “Free-market” think tanks
and journalists, funded by business, provided the simplifications and slogans
needed for politicians to understand and mouth the new verities. In this way,
after 1980, a new economic paradigm established itself, based on widening
income inequality, repression of real wage growth, an accelerated transfer of
manufacturing jobs to east Asia and a resulting high level of structural
unemployment and underemployment. A rickety economy was rescued from collapse
in the 1990s by the dotcom boom, and in the 2000s by asset-price inflation,
financed by exploding private debt-to-income ratios. A banking collapse was
inevitable. Globalisation was business’s “open” economy answer to the problem
of domestic underconsumption identified by Hobson and the declining rate of
profit predicted by Marx. Hobson’s oversaving analysis best explains China’s
reliance on export-led growth, but it also sheds light on western countries’
reliance on access to cheap credit to maintain the stagnating purchasing power
of what is now called “the squeezed middle class”. Analysis in terms of the
declining rate of profit is good at explaining the accelerated transfer of
productive capacity to east Asia. And by completing the destruction of the
Keynesian state, globalisation has handed our future to finance, which Keynes
identified as the most uncertain, least stable element in the economic
structure. According to the Harvard economist Dani Rodrik, we face a “political
trilemma”: press on with globalisation and restrict democracy to improve
economic efficiency, limit globalisation in the name of democracy, or globalise
democracy. The first option will be politically intolerable for large democracies
of the west and the third is pie in the sky, which leaves the second. 
Robert
Skidelsky’s most recent book, co-written with Edward Skidelsky, is “How Much Is
Enough? The Love of Money and the Case for the Good Life” (Allen Lane, £20)
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