Socialist Studies Socialist Studies

Marx versus Keynes

Dancing on the grave of economic liberalism

As a consequence of the current world economic crisis and subsequent trade depression economic liberalism is well are truly dead. For the past three decades it had been the dominant belief system of economists and politicians. It led to Gordon Brown to claim that there would be “no more boom and bust.”; a perpetual economic growth and prosperity for everyone. Capitalism took no notice and in 2008 the economy experienced the worst crisis since the 1930’s forcing former supporters of the free market in business and finance to beg the capitalist State to bail them out.

The Keynesians came out of the woodwork to dance on the economic grave of the free market economists F. A. Hayek and Milton Friedman both of whom had subscribed to the view that the market was perfect, self-adjusting, harmonious and the best of all possible worlds. Leading the dance was the Keynesian economist, Professor Krugman, Laureate Nobel Prize winner in Economics. His blog site contained an entry asking the question: “Why aren’t we all Keynesians Yet?” (http://web.mit.edu/krugman/keynes.html).

And one reason Professor Krugman gave for his rhetorical question was the shadow cast by Karl Marx over 20th economics. Krugman does not like Marx. When it was the 150th anniversary of Karl Marx’s COMMUNIST MANIFESTO he wrote him off as a “discredited prophet” who deserved “no rehabilitation”.

Professor Krugman then went on to assert that although Marx wrote about a lot of upheavals:

What he never managed to do was offer either a comprehensible explanation of why such upheavals happen or any suggestion about what to do with them (except abolish capitalism)”.

He remarked:

By my reckoning, Karl Marx made about as much contribution to economics as Zeppo Marx made to comedy. Or as john Maynard Keynes rather more elegantly put it: “A Marxian Socialism must always remain a portent to the historians of opinion –how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and through them, the events of history

And he concluded his dismissal of Marx by saying:

harsh words –but Keynes earned the right to say them. For it was Keynes, not Marx, who cracked the code of crisis economics –who explained how recessions and depressions can happen. And as Japan and the rest of Asia have gone into an economic tailspin, it is Keynesianism, not Marxism, that offers useful guidance about how they might save themselves”.

Is Professor Krugman right in echoing Keynes’s own sentiments that Marx’s doctrines were illogical and dull? How do they stand up to the test of time? What of Keynes’s own economic doctrines set out in his 1936 GENERAL THEORY? Have governments been able to apply successfully Keynes’s ideas to economic policy to prevent economic crises occurring or to prevent high levels of unemployment?

Why we are not Keynesians

It is true that Keynes expressed complete contempt for Marx’s economics as being obsolete and unscientific. He never even gave Marx the credit for having worked out a theory of inflation almost identical to Keynes’s own theory, or for having before Keynes produced a particular economic field which Keynes made his own – that is the criticism of the French economist J. B. Say who advocated the fallacious theory that there was economic harmony in the market because every seller bought a buyer to the market. As Marx showed in CAPITAL, this was not necessary the case.

First is important to consider how relative over-production –that is commodity production in some branches of industry exceed effective demand.

J. B. Say stated that over-production was impossible since every sale represented a purchase and every purchase a sale.

When Keynes suggested in the 1930’s that demand need not cause full use of the forces of production it was regarded as a revolutionary proposition.

Yet Marx had been there first some eighty years before hand. There had also been the refutation of Say’s law by the experience of several economic depressions since the mid-19th century including the Great Depression at the end of the 19th century.

The theoretical refutation of Say’s theory is simple.

The plausibility of the theory stems from the appearance that whenever someone sells a commodity someone else is paid.

In a money economy a commodity might not be bought for any number of reasons. If this continues for a long period of time the pressure on the seller becomes great because he cannot re-invest his capital, buy further labour power, make a profit and pay his creditors. If this situation prevails long enough in one or several economic sectors the consequence is bankruptcy, unemployment and the stockpiling of unsold commodities.

Marx put it this way:

Nothing can be more childish than the dogma that because every sale is a purchase and every purchase a sale, therefore the circulation of commodities necessarily implies an equilibrium of sales and purchases. If this means that the number of sales is equal to the number of purchases, it is mere tautology. But its real purpose is to prove that every seller brings his buyer to market with him. Nothing of the kind. The sale and the purchase constitute one identical act, an exchange between a commodity owner and an owner of money, between two persons as opposed to each other as the two poles of a magnet…No one can sell unless someone else purchases, But no one is forthwith bound to purchase because he has just sold. Circulation bursts through all restrictions as to time, place …If the split between the sale and the purchase becomes too pronounced, the intimate connection between them, their oneness, asserts itself by producing - a crisis”.
(CAPITAL VOL. 1 p. 87 Kerr edition).

The economic crisis is only capitalism behaving in accordance to its own laws and contradictions. Nothing has gone wrong. No one can be blamed. And economists and politicians cannot do anything to prevent it occurring.

Keynes’s anti-Semitism.

Why Keynes’s almost pathological dislike of Marx? He never really read Marx’s works and constantly misrepresented him.

A question rarely asked in all of the literature dealing with the ideas of Keynes is the extent to which anti-Semitism might have distorted his thinking about Karl Marx. In developing his own ideas about the problems of capitalism, Keynes had to confront Marx's powerful and comprehensive critique of political economy as well as the works of political economists such as David Ricardo and his followers.

And while Keynes's dismissal of Marx was as hostile as Marx's own condemnation of the "vulgar" economists who came after Smith and Ricardo, there is little evidence that Keynes made any serious effort either to read or understand Marx. So why did Keynes reject Marx in such a contemptuous a manner?

Keynes’s own statements made it clear that part of his objection to Marx was that he came from a Jewish background. And that Keynes was steeped in the anti-Semitism which informed the thinking of the late 19th century British ruling class, notably the aristocracy, can be shown in a paper he wrote while still a student at Eton entitled: “the Difference between East and West: Will they ever disappear? (COLLECTED WORKS 1900:20).

This is what Keynes wrote:

[Jews] have in them deep-rooted instincts that are antagonistic and therefore repulsive to the European, and their presence among us is a living example of the insurmountable difficulties that exist in merging race characteristics, in making cats love dogs

And:

It is not agreeable to see civilization so under the ugly thumbs of its impure Jews who have all the money and the power and brains.

(For a comprehensive study of Keynes’s anti Semitism, played down by his biographer Lord Skidelsky, see: The Immoral Moral Scientist: J. M. Keynes, Nina Paulovicova, University of Alberta, Past and Imperfect 2007 http://ejournals.libraryualberta.ca/index).

Certainly in his little book A SHORT VIEW OF RUSSIA (1925) there is an overt dislike by Keynes to the Russian Slav whom he referred to as “cruel”, “beastly” and “stupid” (a racial dislike shared by Hitler). However his antipathy towards Marx was not that he was a Jew but that Marx exalted:

the boorish proletariat above the bourgeois and the intelligentsia who… are the quality in life and surely carry the seeds of all human advancement” (loc cit p.14).

Unlike many who have seized upon Keynes’s anti-Semitism for his dislike of Marx the above quotation gives an altogether different reason.

When Marx stated that the proletariat was the last class to free themselves from class tyranny he added that this struggle was to be undertaken by the workers themselves or as he put it in THE COMMUNIST MANIFESTO “… the movement of the immense majority, in the interest of the immense majority...” Marx saw in the working class a revolutionary potential of “storming heaven”, as he put it in a letter to Engels (CORRESPONDENCE July 1871).

To believe “the boorish proletariat” could think and act in their class interest to create a social system without the capitalist class and their intellectuals were anathema to people like Keynes. How could anyone exalt “the boorish proletariat” above people like Keynes’s smart chums in the secret society known as the Apostles, the intellectuals in the Eugenics Society to which Keynes’s belonged while at Cambridge and his beloved Bloomsbury Set whom he believed carried “all the seeds of human advancement”?

Workers might be the salt of the Earth but not the kind of salt to be found at the High Table of Kings College Cambridge. No, it was class, class interest and class struggle which divided Marx and Keynes; not race. Marx wanted to see the working class abolish capitalism while Keynes wanted to save the profit system from itself.

The Failure of Keynesianism

What of the success of Keynes’s ideas in the hands of his followers, notably economists like Paul Kruger, Civil Servants in the Treasury and Government Ministers? History treats them with savage distain.

We start with Roosevelt’s New Deal in the US from 1932 to 1939. The New Deal was a Keynesian policy. Keynes discussed the policy with Roosevelt. The New Deal did what the Keynesians say a government should do. It greatly increased government expenditure. So it ought to have got unemployment down to negligible levels. But in 1938, after six years of the Roosevelt Keynesian policy unemployment was still at the peak level of 19%.

In 1940, Keynes was forced to concede that war might be the only way that politicians in democratic nations could rationalize spending enough to bring about full employment. “It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case — except in war conditions,” he wrote in THE NEW REPUBLIC (quoted from Was there a Keynesian Economy in the USA between 1933 & 1945 P. Renshaw, JOURNAL OF CONTEMPORARY HISTORY 1999 vol. 34 (3) p. 377 -364).

What turned the situation was the US entering the Second World War in 1942. Not only did conscription artificially and temporally reduce the unemployment figures with the expansion of the armed forces, in its first year of the war the US government spent as much on the military as the entire Gross Domestic Product of the US the year before. The car factories in the US closed in January, and they made no more cars for the rest of the war. By the end of March, the car factories reopened, making tanks and weapons and, by the end of the war, 66,000 bomber aircraft were being rolled off the production lines. (See Paul Koistinen, ARSENAL OF WORLD WAR II: THE POLITICAL ECONOMY OF AMERICAN WARFARE, University Press of Kansas, Lawrence, 2004).

The cost of the Second World War for the US, when 16.3 million U.S. troops fought in a campaign lasting four years, was at a total cost (in 2007 dollars, after adjusting for inflation) of about $5 trillion. That is $5 million million, or £2.5 million million (Joseph Stiglitz and Linda Bilnes the SUNDAY TIMES 23.02.08).

What weight should be given to an economic theory that requires a destructive war for its so-called “success”; a war which saw 600,000 US military killed or injured?

And after the war the US (like Britain) was helped in its economic up-turn by having two trading rivals, Germany and Japan temporality knocked out of the world market.

The second example of the failure of Keynesian theory relates to the record of Labour Governments in the Twentieth Century excluding the 1997 Labour one. In the half century 1924-1979 there were four periods of Labour Government. In the first period, 1924-1931, the Labour Party was anti-Keynesian.

It was because Labour would not adopt a Keynesian policy that Sir Oswald Mosley, one of the labour Ministers in charge of Unemployment resigned and formed his fascist organisation. In the second period from 1945-1951 and in the third and fourth periods 1964-70 and 1974-1979 the Labour Party were Keynesians. But, and this is the crucial test, in every one of the four periods of Labour Government, unemployment was higher when they went out of office than when they went in.

The dole queues did not take any notice when Governments were supporting “good old Keynes”. It was in the middle of the Callaghan Labour Government of 1976 that the Prime Minister threw Keynes overboard and embraced Monetarism. He made a speech in which he said:

It is no longer true, if it ever was that governments can spend their way out of unemployment”.

If Keynes’s doctrines had been available to Disraeli in the 1870’s there still would have been a Great depression just as the depression of the 1930’s would have taken place no matter what economic doctrine the government of the day had adopted.

Why we should all be Marxists not Keynesians

Having shown that neither Keynes has any cure for unemployment and trade depressions, where does Marx come in? Would Marxism succeed to solve the problems caused by capitalism where the others have failed? The answer is no?

Marx’s approach was different. He showed that there is no policy whatever which will prevent capitalism from producing periodic economic depressions and unemployment.

This is what Marx said:

The life of modern industry becomes a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation” (CAPITAL, VOL. 1 p495 Kerr edition).

It is important to keep clearly in mind that the “crisis” is quite distinct from the depression which comes after the crisis.

Keynes and the Keynesians said Marx had got it all wrong and that Marx theories were helplessly unscientific and they promised us that there would never be another depression if Keynes’s policy was adopted.

And what of Japan, singled out by Professor Krugman in the 1990’s as an example of a country embracing Keynes’s ideas to solve its economic problems including the highest unemployment since the end of the Second World War?

Japan’s government went in for bigger and bigger budget deficits and rapidly rising government debt but instead Japan remained in stagnation. In fact the Japanese economy behaved exactly the reverse to what Keynesian theory predicted; for every increase in government borrowing there has been an offsetting increase in corporate saving rather than an increase in investment.

So let us look at the facts.

Before Keynes came along there were economic crises and depressions in 1875, 1921 and 1930. And after Keynes there were economic crises and depressions in the 1970’s when his theory had been adopted by most capitalist governments in the West. They all displayed characteristics highlighted by Marx. So too have the economic depressions which occurred in the 1980’s, 1990’s and today, in the first decade of the 21st century. So on purely empirical analysis Keynesian doctrines have been found wanting.

To understand the trade cycle we have to turn to the writings of Karl Marx.

Marx said that what happens in each phase of the trade cycle is this:

* “moderate activity”: In this phase capitalism is recovering from an economic depression. Production is increasing and capitalists are competing with each other for a share of the market. The market goes to the cheapest producers. Attempts are made to cheapen production through the introduction of labour-saving machinery which continually renders workers redundant and making them jobless.

* “Prosperity or boom”: In the period of boom, production is at its peak and the market seems to be limitless. Profits rise. Capitalists compete with each other to buy materials, machinery and scarce workers. Unemployment largely disappears. In the boom at the end of 1973 a survey by the ECONOMIST showed that over half the companies reported working below capacity because they had more orders than they could meet, but could not buy enough scarce steel, components and labour power –especially skilled workers. In this period wages rise and more workers are in employment. * “overproduction”: Then comes “overproduction”: This was described by Marx as a “disproportions between different branches of industry”. It means that some industries, say steel or ship building or car manufacture or petrol have produced too much for their respective markets. It is not a general overproduction of all industries which is infantile and meaningless.

* “crisis”: Overproduction causes crisis. It is caused by those capitalists committed to buy raw materials and take on workers for which there are no markets for their commodities. It is not caused by an inadequacy of workers’ wages. The wages of the whole working class rise before a crisis enabling them to buy more consumer goods.

* “Depression”: Then comes the depression. It is caused by workers becoming unemployed and reducing their demand for consumer goods. Profits also fall and the wages of the working class also fall.

Then the cycle happens all over again.

Keynes once said that when the facts change, he changed his mind. This aphorism has never been embraced by Keynes’s followers -economists like Professor Paul Krugman. They cling to Keynes despite the facts showing his theory to be erroneous and with no application to the modern world. To hold onto a failed theory in the face of its refutation by the facts is theological dogmatism.

Marx was spot on in his analysis of the economic crisis and explanation of the trade cycle. In the battle ideas between Marx and Keynes, Marx won hands down. The fact that the trade cycle is still with us shows the failure of THE GENERAL THEORY and the economic policy that was to become Keynesianism.

That is why we should all be Marxists and not Keynesians. And this means Marx’s conclusion about capitalism still stands; that is, the working class should consciously and politically organise for the abolition of the profit system and the establishment of Socialism.

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