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Socialist Party of Great Britain - Capitalism In Crisis - The Return of Depression Economics.

The End of Boom to Bust

Since the current economic crisis first broke, there has been an avalanche of books, giving reasons for what went wrong and offering solutions to put the economy on the right track again.

One such book is THE RETURN OF DEPRESSION ECONOMICS AND THE CRISIS OF 2008 (Penguin, 2008) by Paul Krugman, Professor of Economics at Princeton University and winner of the Nobel Prize in Economics. He is a supporter of Keynes, and has been highly critical of the Bush administration and the free market economics it has pursued.

Krugman starts his book with a historical overview of past depressions. The depression of the 1930s, for example, was once considered by economists as a “one-off” aberration, whose social destructiveness and negative political consequences would never return again, through Keynesian or monetarist policy. That was before the 1990s.

Professor Krugman reminds his readers of the economic slump in Asia which bore “an eerie resemblance to the Great Depression” of the 1930s (p 4). That economic crisis was immune both to the monetarist techniques of the bankers, and to government fiscal policy as advocated by Keynes. Since the Asian crisis, there have been the ‘dot com’ crisis, the economic crisis in Argentina, and the long depression in Japan, where all types of economic policy were attempted by the Government to no avail. Outside the Asian and Japanese economic depressions, economists in the US, bolstered by the collapse of the Soviet Empire, saw US capitalism as having solved all the problems of the economy. Free trade, free market and economic liberalism: throughout the world: this was the common belief system held by the majority of economists, politicians and corporate executives. This world view was stamped by the IMF and the World Bank on former Soviet bloc countries, the Latin American countries, notably Mexico, and the emerging capitalist countries, e.g. India. This economic dogma could not be challenged and any dissident was told “there is no alternative”.

In 2003, Robert Lucas, a professor at the University of Chicago, gave the presidential address at the annual meetings of the American Economic Association. He told the assembled economists:

... the central problem of depression-prevention has been solved, for all practical purposes.
(Krugman, p 9)

A year later, Ben Bernanke, a former professor who has since gone on to serve on the board of the Federal Reserve, in a speech entitled The Great Moderation, said that “modern macroeconomic policy had solved the problem of the business cycle” (ibid., p 10).

Economists claimed to have created conditions of market ‘equilibrium’ through policy instruments like the manipulation of the interest rate mechanism by central banks, allowing politicians like Gordon Brown to boast that there would be no more “boom and bust” on his watch. The ‘free market’ zealots and bankers could do no wrong. They were supposed to be the “masters of the universe” (ibid., p 119). Each year, they met at the exclusive World Economic Forum at Davos in Switzerland to be told how wonderful they were, at the splendid parties they threw for invited politicians. The reality of capitalism, with its anarchy of production, and the inability of sellers to know whether or not there were buyers for their commodities, eventually pricked such overblown pretensions.

Capitalism Triumphant

Professor Krugman believed the misplaced confidence of US economists was largely influenced by the US winning the Cold War. Economists thought that there had been a “collapse of Socialism” as a “ruling ideology” (p 10).

Nothing of the sort had occurred. There had been no Socialism in the USSR. The wages system, which meant class exploitation and class struggle, existed in Bolshevik Russia . Socialism had not been established consciously and politically by a Socialist working-class majority. Capitalism existed in Russia prior to the Lenin’s coup d’etat; afterwards Russian capitalism, largely run by the state, had been described by the Socialist Party of Great Britain as early as 1918 as state capitalism. Common ownership and democratic control of the means of production and distribution by all of society did not exist in Russia. The Soviet Empire was not Socialist.

To demonstrate that nationalisation has nothing to do with Socialism we only have to consider the current economic turmoil in Russia. According to the DAILY MAIL (23 December 2008), “Huge swathes of the country’s natural resources” are about to be re-nationalised by the State because many of the billionaires who made their money after the collapse of the Soviet Union are facing financial ruin. No-one calls this ‘Socialism’ or ‘Marxism’. This policy is to protect the national interest.

The same poor reasoning by Krugman is applied to China’s economic reforms in the 1990s. Krugman’s assertion that “a billion people had quietly abandoned Marxism” (p 11) is merely empty rhetoric, based on ignorance of what constitutes Marxism. A majority of those people were employed as wage slaves in state enterprises prior to China’s economic reforms, and they found themselves employed by private companies as wage slaves after the reforms. Plus ca change!

Given the low level of Socialist consciousness found in China, it is doubtful whether there were many ‘Marxists’ in this backward capitalist country. If there were any students of Marx, then they would have understood that wherever the wage-capital relationship holds, workers are exploited, producing more social wealth than they receive in wages and salaries. This ‘surplus value’ goes to the capitalist class, whether the employer is an individual, a family, a company quoted on the stock exchange, a corporation, a multi-national, a trans-national, or a government department.

Of course, the ignorance of politicians and economists in the US did not stop them believing that the collapse of the Soviet Union was “significant”. It might have removed the belief of the Soviet leadership that “they had history on its side” (p 12); but their ignorance led to the equally stupid belief that the world was “favourable to the political and ideological dominance” of Western capitalism, particularly the US, and that the capitalism found in the US represented “the end of history”.

According to Krugman, the collapse of the Soviet Union led to a deep pessimism for the opponents of capitalism. By the turn of the century, “the heart has gone out of the opposition to capitalism… for now capitalism rules the world unchallenged” (p 14). Such is the supposed “unchallenged” triumph of capitalism over the globe - all wishful thinking.

The Taming of the Business Cycle?

Krugman believes that the great enemies of capitalist stability have always been war and depression. Although he concedes that war is still with us, he cannot see how wars like those of 1914-1918 and 1939-1945 “could erupt in the foreseeable future” (p 15).

Well, if Professor Krugman cannot see serious global conflict in the foreseeable future, capitalist governments certainly can. China is busy tying up the African continent in pursuit of its national interests, the US is doing the same around the countries abutting the Russian Federation, and Russia itself is intent on being a super-power again. Russia, for example, plans to massively increase its weapons procurement spending by some £96 billion, including the purchase of 70 nuclear missiles (INDEPENDENT, 24 December 2008). Russia also threatens adjoining countries like the Ukraine - a NATO member - and other European countries, by its control over key resources like gas which it uses as a political weapon.

Capitalism causes wars, small and great, and struggles over raw materials, trade routes and spheres of influence mean the likelihood of more conflicts through the 21st century, not less. And the weapons at the disposal of the great capitalist powers - and the lesser ones - are far more deadly than those used in the two main wars of the 20th century.

Professor Krugman is more concerned with the consequences of the current economic depression. He believes that the current crisis and depression means that the world economy has “turned out to be a much more dangerous place than imagined” (p 181). He believes that the consequence will mean a limitation on prosperity for a large part of the world, generating discontent and social disorder (there have recently been riots in Greece, France and Sweden, and demonstrations throughout Russia). And he notes that conventional policy responses to the economic crisis do not seem to have any effect (p 184).

So what solution does Professor Krugman offer? He states that policy makers need to do two things: get credit flowing again and prop up spending, but he does not think that this is enough. He then suggests: “Full temporary nationalization of a significant part of the financial system” (p 186). He believes that policy- makers should not see this as “socialist”. And if this fails, then it is back to “good old Keynesian fiscal stimulus” (p 187).

Capitalism goes its own way. Credit is still not flowing, some three months after the government’s reforms. Large parts of the banking system have been either fully or partly nationalised, both in the US and in Britain, but still credit has not materialised. And a stream of Chief Executives, once advocates of economic liberalism and the free market, are queuing outside Congress and the Treasury, begging for state money.

And it should not be forgotten that there are some capitalists and their political representatives who believe failures in the market should not be bailed out, and the crisis and depression should be allowed to takes its course without government intervention. A US ‘free-market’ think tank, the Cato Institute, opposed financial support for the US car industry, and argued that the weak should go to the wall, even if it cost 2 million jobs (BBC NEWS, 23 December 2008). Its spokesman said that the Southern States in the US produced more efficient cars, with lower wage rates than in Detroit and other Northern US cities: they should be allowed to succeed, not the market failures. Other reasons for this were that the major American car manufacturers, with trade union agreements and large pension funds, were in the North, while foreign car plants had been set up in recent years in the historically low-wage South where, if there was any recognised trade union agreement, it was weaker than in the North, while pension funds were also less of a burden.

In Britain, in a letter to the Times (26 December 2008), a correspondent made the following point about Jaguar, owned by the Indian conglomerate, Tata:

If Tata decided not to use its other resources to keep Jaguar Land Rover solvent, the business would become insolvent and Tata’s investment would be wiped out. It is then likely that a buyer would step forward and acquire the business out of insolvency at a vastly reduced price from that paid by Tata, and most of the jobs would likely be saved,. If no such buyer were to come forward, even at a negligible price, then it would be proof positive that the business had no future.

He then went on to conclude that taxpayers’ money should not be used to prop up failed businesses.

To demonstrate the failure of Keynesianism, consider two things: first, cutting taxes like VAT, to encourage spending, only restricts the amount of money the government has to spend, and does not guarantee that people will spend any more money, particularly if they are about to go bankrupt or lose their jobs. Governments have nationalised banks, but the credit flow is still only a dribble as banks try to build up their capital reserves and pay off their debts. In fact, even by the end of January 2009, banks still did not know the full extent of their “toxic debts”.

Secondly, we can look at 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, 1964-1970 and 1974-1979, the Labour Party were Keynesians.

But, and this is the crucial test, in every one of those four periods of previous Labour governments, unemployment was higher when they went out of office than when they went in.

It remains to be seen whether the current Labour Government finally go out of office with unemployment at a higher rate than when they formed the 1997 government under Blair. The odds are against Brown’s Government. The dole queues did not take any notice whether the Government was supporting “good ol’ Keynes” or not.

What about Marx?

Krugman nowhere mentions Marx. Krugman thinks that Marx and Marxism are buried under the rubble of the Berlin Wall. The omission of Marx from his book is a glaring oversight from someone who is supposed to be an economist. It is like writing a book on composers and omitting to mention Mozart.


capitalist production moves through periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation (SWI, p 440).

Marx argued that economic crises and depressions are caused by commodity production and exchange, for profit. Crises will continue to occur as long as the profit system remains in existence.

When he was preparing his notes for what was to become CAPITAL, Marx wrote:

The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. The violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation, is the most striking form in which advice is given to it to be gone and to give room to a higher state of social production [socialism]… These contradictions.. lead to explosions, crises, in which by momentary suspension of all labour and annihilation of a great part of the capital violently lead it back to the point where it is enabled [to go on] fully employing its productive powers without committing suicide.
GRUNDRISSE, Penguin, pp 749-750

Capitalist production develops in cycles, which are “always only a momentary and violent solution of existing contradictions” (CAPITAL VOLUME III, chap. 15, p 357). Marx continued:

To express this contradiction in the most general terms, it consists of the fact that the capitalist mode of production tends towards an absolute development of the productive forces irrespective of value and the surplus-value this contains, and even irrespective of the social relations within which capitalist production takes place, while on the other hand its purpose is to maintain the existing capital and to valorize it to the utmost extent possible (ibid., pp 357-358).

Crises rein back the forces of production, including social labour, through depreciation of capital, destruction of commodities, reduction of output, and high levels of unemployment. The crisis and subsequent trade depression bring commodity production back within the narrow boundaries of capitalist social relations of production, i.e. the wages system, and private ownership of the means of production

It is in this sense that Marx stated that capitalism is a fetter on production. The productive forces can never be freely developed in capitalism to meet human needs.

Marx’s conclusion to the contradictions of capitalism, with its subsequent social problems like unemployment, was for the working class to abolish the profit system and replace it with Socialism. This was not a conclusion to be found in Professor Krugman’s book. Nor did Socialists expect one to be found there.

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