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Socialist Party of Great Britain - Capitalism In Crisis - Marx, Minsky and the Moment of an Economic Crisis.

Marx, Minsky and the Moment of an Economic Crisis

Mainstream economics holds as an article of faith that capitalism is harmonious and self-adjusting. Until the economic crisis of 2008, most economists believed capitalism was inherently stable. They rejected that capitalism passed through “certain periodical cycles” which were “…a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation” (Marx, Wages, Price and profit, SELECTED WORKS, p. 440). Crises, for Marx, were neither an accident nor the fault of individuals, but arose from the economic laws of capitalism, particularly the relationship between the commodity and money.

One of the leading theorists of a “perfect and harmonious capitalism” was the economist and Nobel Prize Winner, Edward C. Prescott. He was one of several economists who proposed an economics of “rational expectations” which assumed that individuals took all available information into account in forming future expectations. One piece of available information they were meant to take into account was the absence of any future economic crisis! So confident was Prescott in the soundness of his theory that in 1999 he announced that capitalism would double the standard of living every 40 years that Marx’s critique of capitalism was wrong and Socialism was unnecessary. He wrote:

The Marxian view is that capitalistic economies are inherently unstable and that excessive accumulation of capital will lead to increasingly severe economic crises. Growth theory, which has proved to be empirically successful, says this is not true. The capitalistic economy is stable, and absent some change in technology or the rules of the economic game, the economy converges to a constant growth path with the standard of living doubling every 40 years. (SOME OBSERVATIONS ON THE GREAT DEPRESSION, Federal Reserve Bank of Minneapolis Quarterly Review Winter 1999)

This misguided view of capitalism enthused politicians like Gordon Brown, to praise contemporary economics with its optimistic “theory of growth” grounded in “empirical observation”. So, taken in was Brown by rational expectations, he repeatedly announced, when Chancellor of the Exchequer, that there would be no more “boom and bust”. Brown, like Prescott thought we were really living in the best of all possible worlds.

About 15 years and two economic crises later, Marx’s view that that capitalism is indeed inherently unstable agrees with reality rather than the Panglossian vision of Prescott and his fellow economists. It turned out that rational expectations was wrong and the associated “growth theory” was not grounded in the real world.

However, even though reality pointed to the trade cycle being a fact of life under capitalism, Marx was not praised for his insight into why the trade cycle exists. Instead economists believed that crises were all the fault of the finance sector of the economy and its greedy bankers (the trite “who to blame and who to punish” DAILY MAIL school of economics).

Economists could not except that there were problems within commodity production and exchange for profit. No, the problem, they thought, was finance and irrational greed, and they found a champion for this view in the writings of the economist, Professor Hyman Minsky.

The Minsky Moment

The Minsky moment is all the rage with economists. It is the new fashion to replace the discredited theories which saw capitalism as perfect and immune to economic crises. The Minsky moment was recently explored by the TUC’s former senior economist, Duncan Weldon, on a radio programme, Why minsky matters (BBC 4, 4th March 2014).

The "Minsky moment", was a term created by Minsky’s many economic followers as the moment when there is a seemingly inexplicable financial crash. It is like the moment that the cartoon character Wily E Coyote runs off a cliff. Wily keeps on running for a while, still believing he is on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when he looks down and sees nothing but thin air. He then plummets to the ground, and that's the crisis and crash of 2008.

In the programme one of Minsky’s supporters, the Keynesian, Professor Steve Keen said:

He was more driven by seeing the conventional theories being a delusional thing, a Disneyworld view of the real world. He was much more for getting your hands dirty in the real world. I think Minsky gave us the first sensible overview of capitalism ever, which had warts and all what capitalism is about.

Did he? What about Marx who was not mentioned once in the programme? Instead the free market Mises Institute got a couple of minutes to give a contra view to Minsky but no one was asked to give a Marxian account of the crisis to meet the BBC’s “balanced objectivity”. Given Weldon’s past; from admirer of Oswald Mosely to Research Officer for the Labour Party, then on to the TUC to finish in a comfortable niche at the BBC, it is hardly surprising.

Marx and Minsky

Minsky’s famous slogan was “stability is destabising” and the fact that he attributed “crises” to capitalism has led some to try and integrate Minsky with Marx with as much success as integrating Gothic Architecture with Classical architecture. Eclecticism is always inconsistent, messy and incoherent.

As the economist, Professor G. Carchedi noted recently:

First, both for Marx and for Minsky the capitalist economy is fundamentally unstable and develops through time (whereas neoclassical theorems as well as many Marxists (sic) focus on equilibrium and abstract from time). But here the similarities end. Minsky (following Keynes) sees the economy “from the board room of a Wall Street investment bank”, Marx from the perspective of labour (BEHIND AND BEYOND THE CRISIS, G. Carchedi, May 22 2011 http://www.homolaicus.com/economia/fonti/carchedib.pdf).

Minsky believed the problem of crises emanated from the financial sector of capitalism conveniently sidestepping asking awkward questions about commodity of production and exchange for profit. For Marx, the economy’s instability was an objective feature, it was the result of the contradictions in the real economy towards crises, first in that sector and then in the financial ones.

Carchedi pointed out the political reason why Minsky looks to the financial sector rather than capitalist production generally:

Minsky erases Marx’s classes, class interests, and class struggle. Thus, for Minsky, government spending (deficit) can offset private spending and even increase profits. For Marx, value transfers from capital to labour decrease profitability thus amplifying the cycle while transfers from labour to capital increase profitability but augment the difficulties of realization. Neither redistribution… not Keynesian polices… can push the economy out of depression and crisis. Marx’s and Minsky’s are not complementary but radically alternative theories (loc cit).

If the “Minsky moment” was a cartoon caricature of the economy focussing on the effect of a crises rather than its cause, then it is back to Marx and the problems associated with commodity production and change for profit where the forces of production come into conflict with the relations of production, expressing themselves in a crisis.

That Marx Moment

Marx was quite clear that: “production, distribution, exchange and consumption are identical, but that they all form members of a totality” (GRUNDRISSE).

And he went on to remark:

Production predominates not only over itself…but over the other moments as well…A definite production thus determines a definite consumption, distribution and exchange as well as definite relations between these different moments. Admittedly, however, - production is itself determined by the other moments…Mutual interaction takes place between the different moments (loc cit).

So, what is a “Marx Moment?” when applied to the trade cycle? By way of an analogy, we can consider a train full of commodities hurtling towards a train station platform full of money. The train has to go pass along a bridge over a deep ravine to get to the station where all the money awaits those wanting to sell. The train has made the journey before and at the moment is making the trip several times a day in order to get the commodities to the station as fast as possible. Yet on one journey the bridge has inexplicably disappeared. The train pulls to a halt at the edge of the ravine and the commodities cannot get to the station and embrace the waiting money on the other side; that is a “Marx moment”. Marx put it this way:

Crisis results from the impossibility to sell. The difficulty of transforming the commodity…into its opposite, money,…lies in the fact that money is not the particular product of individual labour, and that the person who effected a sale,.., is not compelled to buy again at once, to transform the money into a particular product of individual labour…The difficulty of converting the commodity into money, or selling it, only arises from the fact that the commodity must be turned into money but the money need not be immediately turned into a commodity, and therefore sale and purchase can be separated…Crisis is nothing but the forcible assertion of the unity of phases of the production process which have become independent of each other (THEORIES OF SURPLUS VALUE, Part II,p.506).

Unlike the Keynesians who believe the cyclical behaviour of the economy can be controlled by appropriate government policies and the supporters of Minsky who believe financial regulation should do the trick, Marx believed that economic crises were inevitable in a capitalist economy and the only way to stop crises occurring was for a conscious and politically motivated socialist majority to replace capitalism with Socialism.

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