Socialist Studies Socialist Studies
 

Reconstituted Socialist Party of Great Britain (1991) Socialist Education Series - Monetarism, Keynes and Marxism

Introduction

The title “Monetarism, Keynes and Marxism” calls for some explanation.

Economics is put at the forefront of election campaigns. Policies of capitalist politicians are based on ideas produced by economists like Keynes and Milton Friedman

In elections socialist ideas are misrepresented, the ideas of Marx are treated with contempt and misleadingly linked to the failed doctrines of State capitalism.

What is important for the working class is to show what Marx would have said about the economic ideas of Keynes and Friedman.

And it is important for socialists to show that the economic policies of Keynes and Friedman are based on a fundamental failure to understand how capitalists operate, something which Marx did understand.

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Economic Confusion

There are frequent article about Keynes, Friedman and Marx made by politicians and in newspaper articles. Recently the TIMES published an article by Michael Gove on Marx’s failures and this was followed up by letters sent to the editor either agreeing or disagreeing with him. Trade Unions, who should know better, are supporters of Keynes while the Friedman is seen by his supporters as a precursor to “economic liberalism” followed by most governments of the world and supported avidly by Samuel Britten , the Institute of Economic Affairs and advisers to the Prime Minister.

There are those who have tried to understand the lectures of politicians on economic matters and to follow various economic journalists and have found it a discouraging experience. To many readers the contradictory statements, unintelligible English, obscure jargon and poor reasoning is utterly confusing.

Here are some examples of the confusion.

First who are the Keynesians and who are the Monetarists?

From 1945 to 1976 the Tories, the Labour Party and the liberals were all officially supporters of Keynes. From 1976 most, but not all the Tories were Monetarists. And most of the Labour Party and the Liberal Democrats remained committed Keynesians.

But who first put forward the Monetarist policy that was subsequently adopted by Thatcher and her Successors?

It was Harold Wilson’s policy advisers in the late 1950 are who first considered Monetarist policies when the Labour Party was not in office. And which Government was the first to adopt Monetarism? It was the Callaghan Government in 1976.
So who were the Marxists? The Conservative Party used to describe the Labour Party as “Marxist”. A few years ago a Professor of History, Norman Stone wrote an article in the TIMES to prove the Labour Party was Marxist. Mrs Thatcher said the same. The Labour Party used to say that they were influenced by Marx. The Father of the Labour Party, Kier Hardie, declared at the formation of the Labour Party, that it was totally Marxist.

The confusion was compounded by Milton Friedman. Professor Friedman told Mrs Thatcher that Marx was a Monetarists like him and Mrs Thatcher.

On the basis of this confused reasoning the Thatcher Government and her successors were “Marxists” just as the Tory Government who were going to propose nationalising the Railways in the 1840’s were “Communist”.

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Why This Confusion

Why the confusion? That the confusion and contradictions exist is self-evident. But why do they exist?

There are three reasons.

The first is that capitalist politicians are not missionaries but salesmen.

They are in public life not as dedicated exponents of certain economic theories but as politicians trying to win the next election.

Suppose for example, that Blair, Howard or Kennedy all became convinced of what is in fact the truth, that governments cannot do anything about unemployment. Unemployment takes is own course whatever reforms governments enact. Whichever government told the truth about unemployment and its cause would be committing political suicide if it wants votes from a non-socialist working class.

So they have to say that they can run capitalism and produce policies to end this or that social problem like unemployment.

So when Keynesianism and Monetarism policies do not work governments have to do a U-turn.

The second reason is that once an economic policy does not work, supporters of Keynes become monetarists and monetarists become supporters of Keynes. This is the situation of Callaghan and Healy in 1976.

Consider these four statements:

• “We are all Keynesians now”: Harold Wilson in 1953

• “Keynes is dead”: SUNDAY TELEGRAPH City editor, 1976

• “We are all Monetarists now”: TIMES editorial 3/10/85

• “The demise of Monetarism”: TIMES 1 March 1987.

The last quotation was an interpretation by the TIMES of the Chancellor’s budget speech.

Consider the way in which the Keynesian policy collapsed in 1976. The Keynesians have two policies. The first is to cure unemployment and the second is to cure inflation.

The cure for unemployment is for the government to spend a lot more money, without an increase in taxation. The Government raise the rest by borrowing from investors which increases the national debt. It is called running a budget deficit.

The other policy is to cure inflation. This requires the government to do the opposite by running a budget surplus. This surplus is then used to reduce the national debt.

This is no problem for the government when only unemployment is going up and prices remain stable. The government runs a budget deficit.

And there is no problem when only prices are going up and unemployment stays low. The government then runs a budget surplus.

But what does a Keynesian government do when unemployment and prices are both going up fast at the same time?

This is like a patient with a serious heart condition who is also overweight who is told by his doctor that for the sake of his heart he must avoid all violent exercise, but must also run five miles every day to get his weight down.

Faced with this impossible situation the Labour Government in 1976, decided to drop the Keynesian cures and try Monetarism which did not work either.

The third reason for the confusion is the relation of Monetarism to Marx.

The major part of Marx’s life was devoted to the study of the economic laws of capitalism. No one else has done it more thoroughly.

The study of the economic laws of capitalism was embodied in Marx’s book called CAPITAL and in other works and was, he said, the basis of his theories like the Labour Theory of Value and his concepts like surplus value.

Never a day passes without some politician or journalist attacking some individual or political party or economic theory for being “Marxist”.

To do this legitimately they need to know what Marx’s economic theory was. Most of those who attack Marx are ignorant of his writings and his theories. They are simply using the word “Marxist” simply as a term of abuse just as those who write of the Reconstituted Socialist Party of Great Britain (1991) as being a “sect”.

Take Keynes himself. He 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 all 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 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, but further labour power, make a profit and pay his creditors.

If this situation prevails in one or several economic sectors the result 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).

Keynes’s own statements made it clear that part of his objection to Marx was that Marx came from a Jewish family and Keynes was anti-Jewish as shown in his reference to “some bestialities in the Jewish nature”. Keynes was also an advocate of eugenics.

Then there is Harold Wilson, who was an anti-Marxist, but admitted he never got beyond the first chapter of Marx’s CAPITAL.

Or take the late Bernard Levin who actually got beyond the first chapter of CAPITAL but could not finish reading it. But this did not stop Mr Levin dismissing Marx’s economic theories as “rubbish” because someone he used to have agreeable dinners with once told him that they were “rubbish”.

Or Connor Cruise O’Brian who wrote a long article for the OBSERVER at the centenary of Marx’s death and did not even mention CAPITAL or that Marx was primarily wrote critiques of political economy or economics as it is referred to today.

Norman Stone, who learnt his history from A.J.P. Taylor, the author of one of the worst prefaces ever written to Marx’s THE COMMUNIST MANIFESTO, wrote an article which tried to prove the Labour Party was “Marxist”. At the end of the article he threw in the statement that Marx said Socialist society would be based on the gold standard.

A member of Reconstituted Socialist Party of Great Britain (1991) wrote to Norman Stone-the “great” historian-asking him where Marx is supposed to have said this.

The professor replied that he did not know where Marx is supposed to have said that Socialism would be based on the gold standard. He thought that he had got it from another historian, A. J. P. Taylor when attending his lectures. Surely the case of “the blind leading the blind”?

Of course Marx never did say this. He urged the working class to abolish the wages system. Socialism would have no currency. It would be a moneyless society.

One lone exception to this was Sir Keith Joseph later Lord Joseph, who after debating with Reconstituted Socialist Party of Great Britain (1991) drew up a reading list for the top Civil servants in his department and included Marx’s CAPITAL on the list. CAPITAL is in the Treasury’s library but most probably unread.

This has its amusing side.

Keith Joseph, before the debate with Reconstituted Socialist Party of Great Britain (1991), had been alerted to “Marxist” lecturers at the Open University preaching to students Marx’s Labour theory of Value.

It turned out that what was being taught to students there was Smith’s cruder theory of value although the lecturer thought he was teaching Marx’s theory. Both the lecturer and the person who reported to Keith Joseph alleged revolutionary stirrings in Milton Keynes were both totally ignorant of Marx’s theories.

You can take it for granted that the great majority of the statements made about Marx were by people who have never heard of Marx.

They were the “Marx Misrepresentation Industry”. They included both Lord Keynes and Milton Friedman.

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Milton Friedman and Marx

It was mentioned earlier that Milton Friedman, the Monetarist, told Mrs Thatcher that Marx was a Monetarist like him. Perhaps he thought he was doing Marx a good turn. But Professor Friedman has it all wring like all the others.

In Marx’s theory money meant only notes and coins.

For Friedman and Thatcher what they call money supply is not just notes and coins but in addition bank deposits. It is quite a different theory have its origins in the writings of the 17th century economist and philosopher John Locke.

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Comparison Between Keynes and Monetarists

The way the Keynesians and the Monetarists differ about policy can best be seen in their conflicting views on particular issues.

First comes the question of government spending.

The Keynesians want it to be increased.

The Labour Party is committed to government spending in the belief that it will create more jobs. The monetarists want it to be cut down. The Tories under Thatcher and her successors believed that if government spending went down, taxation reduced people will have more money to spend which will create jobs.

Then there is the issue of the extent to which the government should be involved in industry.

The Keynesians want more and more of State intervention in industry either through nationalisation. They want control of companies and investment and they want Local Authorities to build houses and engage in trading activities.

The Monetarists want the opposite. They want the privatisation of nationalised industries. As one of their supporters once remarked “If it moves privatise it”. They want Local Authorities to pull out of all commercial activities. They subscribe to the Nicolas Ridley view of Local authority where Councillors and a few officials open private sector tenders for all services. They are also against subsidies to industries.

Milton Friedman put it this way: “The trouble with the country is that there is too much government”.

The Keynesians and the Monetarists have opposite policies for monopolies and competition. The Keynesian policy for monopolies is to nationalise them. This used to be the Tory Policy. The Monetarist’s policy is to encourage market competition.

The Thatcher Government and successive Tory ones opened up competition between banks and building societies, between lawyers, between BT and Mercury and between bus and coach companies.

The Trade Unions are an interesting case. The Labour Government tried to tighten Trade Union Law with a Pay and Incomes Policy in the 1960’s erroneously blaming Trade Unions for inflation when, in fact, it is caused by governments pushing more money into circulation that is needed for Trade.

Monetarists, while not blaming trade unions for inflation see them as an uncompetitive monopoly in the labour market preventing “labour market flexibility”.

Blair has followed the Tories in keeping the anti-Trade legislation, but just as Thatcher was no Tory but a Manchester Free Trade Liberal so too is Blair.

On interest rates the Monetarists say that they should be left to market forces while the Keynesians state that Governments should reduce interest rates

Then there are the foreign exchange rates.

Historically the Keynesian Labour Party has a record of lowering the exchange rate. In 1949 the Pound was reduced from $4 to $2.8 and in 1967 it was reduced from $2.80 to $2.40.

But the policy was rather somewhat forced on them by inflation.

The Pound has continued to fall from its 1967 level so that it now worth only $1.6.

Thatcher and her Chancellor, Nigel Lawson took the line that they did not want the Pound to fall any further. Milton Friedman wanted the Pound stabilised at a higher level.

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History Answers Monetarism

There is a simple test of any set of theories. It is what happens when they are put into operation.

Let us take Monetarism first.

Mrs Thatcher and her advisers in the 1980’s spelled out what were the conditions which will produce permanent prosperity.

Here is the list of conditions:

• Low government spending
• Low Taxation
• No Inflation
• Lower wages
• Weaker trade unions
• A flourishing manufacturing industry
• Low Interest rates
• A Stable Foreign Exchange Rate for the Pound>
• And lastly, no Labour Government.

There was a time when all these conditions existed. It was 1875.

Government spending was only about a fifth of what it is today and governments hardly needed to borrow to pay their way.

Taxation was equally low. Income tax was about 1 Penny to the Pound.

There had been no inflation for about fifty years.

Wages were only half of what they are now.

The Trade unions were small and weak and Trade union law much more restrictive.

Manufacturing was flourishing and British capitalism was referred to as the “Workshop of the World”.

Interest Rates were a third of what they were when Thatcher embraced Monetarism in the 1980’s. In the ten years between 1865-75, the Bank Rate was never above 5%. The average Bank rate between 1865-74 was about 3 ½ percent.

Foreign Exchange Rate of the Pound had been stable for fifty years.

And last of all and most important in Mrs Thatcher’s eyes was that there was no Labour Government. The prime Minister was that Tory idol, Benjamin Disraeli.

So what happened in 1875?

We take as out authority a British Government publication, issued in 1957 by a Tory writing of Labour. It reads:

“A period of trade depression followed the year 1875 and lasted almost 20 years”.

It is recorded in economic history as the Great Depression.

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The Failure of Keynes

So much for Monetarism. Now for the Keynesians.

History treats them with equal savagery but it is not so quite straightforward.

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%.

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.

It remains to be seen whether the 1997 Labour Government finally goes out of office with unemployment higher than when they first went in. But the Blair government cannot be regarded as Keynesian since they have slavishly followed so much Tory Monetarist policy.

The dole queues did not take any notice whether the Government was supporting “good old Keynes” or “good old Milton Friedman”.

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

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Unemployment: Marx versus Keynes and Monetarism

Having shown that neither Keynes nor the Monetarists have 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.

So let us look at the facts.

Before Keynes came along there were depressions in 1875, 1921 and 1930. And after Keynes there were depressions on 1958, 1963, 1972, 1977 and 1979. They all displayed characteristics highlighted by Marx.

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.

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Fallacy of Creating Jobs

We now come to what the politicians describe as “creating jobs” as a cure for unemployment.

The various governments who have supported Keynes both promise to cure unemployment, if elected, by using the method of increased government spending.

The Monetarist governments argue that by cutting government spending and lowering taxation more jobs will be created. Thatcher boasted in 1983 that her monetarist government had created 1 million new jobs.

At the time she was asked that if her government had created one million new jobs why had not the unemployment figures fallen?

The answer is that though any government can create jobs-like the Labour government “New Deal” for workers under 25-by spending money no government can reduce the total number of the unemployed. Unemployment follows its own course, irrespective of what the government policy is.

It is pure chance whether a particular political Party wins an election when unemployment is going up or whether it is going down.

And another thing. If the government spends £6 billion more in one direction –NHS for example –the taxpayers spend £6 billion less elsewhere.

The reason why government spending on creating jobs does not reduce the total amount of unemployed workers is simple. Every increase in government spending in one direction is cancelled out by an equal amount of spending elsewhere.

This can be seen in the Trade Union scheme in the 1970’s to create jobs in the Health Service by reducing defence expenditure. If the government creates 200,000 jobs in the Health Service and sacks 200,000 workers in the armed forces it does not reduce the total unemployment.

But it is equally true of any government increase of expenditure. The only way that it can be paid for is by reducing the purchasing power of taxpayers by an equal amount.

In Roosevelt’s New Deal of 1932 government expenditure went up fast but private investment fell as a result.

The falling rate of employment enjoyed by the incoming Blair government of 1997 would have happened whatever government came to power.

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Inflation and Price Control

In addition to unemployment and depressions the Keynesians, Monetarists and Marx also had theories on inflation and price control.

There was a strange change of attitude of economists and politicians towards inflation between 1914 and today.

Take unemployment first.

In the 19th century most economists and politicians didn’t really think they could control unemployment. They accepted it as a fact of life. It was the reformist SDF under Hyndman who called for “the right to work” at the tail end of the Great Depression.

But after Keynes became fashionable the economists and politicians believed that any government can maintain full employment.

As Professor F. W. Paish said in 1954 about the Report of the Radcliffe Committee:

“No Government will in future allow any real substantial amount of unemployment to appear even temporarily”

No economist or politician could have said that in the 19th century.

But with price control the reverse has happened.

In the 19th century and up to 1920 most economists and politicians knew that the government can control inflation and deflation and can establish relative stability of the price level.

But since 1938 they have lost the knowledge of how to do this and have stood helplessly by, while prices have multiplied 22 times.

If we look at the history of price control from the beginning of the 19th century to the end of the 1980’s it is interesting to look at the movement of prices over the past two centuries.

The Price Record over Two Centuries

Period

Prices-up

Prices-stable

Prices-down

1938-1988

50 years x 22

1813-1850

- 50%

1850-1914

Stable 64 years

1914-1920

x2.5

1920-1930

- 50%

The record is held by the Labour Government of 1974 to 1978 where the price level more than doubled in 5 years.

During the Thatcher years, from 1979, the price level increased by 85%

It was Marx who had a correct theory of prices.

Marx provided the correct explanation why the general price level sometimes goes up, sometimes goes down and is sometimes relatively stable.

Two factors are involved.

There is a moderate rise in booms and a reverse in a trade depression.

The second factor relates to the currency. It turns on the amount of currency in circulation that is notes and coins.

The price level was kept stable between 1850 and 1914 by the Gold Standard which
prevents an arbitrary increase or decrease in the amount of currency.

Consider deflation and inflation.

If the amount of currency is arbitrary decreased this reduces the price level and is called deflation. That is what was done between 1820 and 1850 and between 1920 and 1930 when millions of notes were burnt.

If the amount of currency is arbitrary increased prices go up. This is called inflation. The amount of currency in circulation in 1938 was only £500 million but by the end of the 1980’s it had risen to £13,000 million.

Economics is an expression of political interests. Class interests are behind inflation, deflation and the gold standard.

The question arises why did British capitalism, which for a century or more favoured the Gold Standard, and stable prices, then went in for 50 years of inflation and constantly rising prices?

As inflation is bad for lenders of capital and good for borrowers of capital, and as manufacturers are the biggest borrowers of capital, it might at first glance be considered that inflation ought to have been favoured by the manufacturers.

But it won’t do. These 50 years of inflation have been quite disastrous for British manufacturing industry.

The most valid explanation is that the whole of the Tory, Labour and Liberal Parties were taken in by the Keynesian vision of a permanent boom economy, Full Employment and no more depressions.

And there has no longer been a solid body of reputable economists to tell politicians that the whole thing was a fraud.

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The Keynesians and Monetarists' Price Theory

We have already remarked on the fact that he politicians and economists have forgotten how to control the price level.

What the economists have done is to invent a new price theory.

They say that the price level is determined by the Banks.

J. M. Keynes wrote this:

“The internal price level is mainly determined by the amount of credit created by the banks …[which] in its turn is roughly measured by the volume of the bank deposits” (MONETARY REFORM p. 178).

What has happened since monetarist doctrines were adopted in 1976 is that the government, the Treasury and the Bank of England have been trying to apply Keynes’s theory that the price level is determined by the Banks.

But having abandoned the view of Marx and other 19th century economists that what matters is the amount is the amount of notes and coins in circulation; they have been unable to make up their minds which bank loans and which bank deposits they should be seeking to control.

The Treasury, for example, had been publishing no fewer than 6 different views of what they call “money supply”.

Keynes himself did not deny that an arbitrary increase in the amount of notes and coins would cause an inflationary rise of prices.

What Keynes did do was to claim that the banks have the unique and magical power to intensify the effect of a given amount of currency on the price level.

This is how it was put in a book to which Keynes wrote an introduction:

“Banks cannot increase the supply…of notes and coins, but they can increase the supply of credit…and this is equivalent in its effect on prices and an increase in the supply of money” (PUBLIC FINANCE M. E. Robins p. 129)

That is to say that if you deposit £1000 in the National Westminster Bank they can lend £9000.

The choice of Bank occurs because the Chairman of the Westminster Bank (before they merged with the National) said it was completely contrary to the facts about Banking.

He wrote: “The Banks can lend no more than they can borrow from depositors” (Walter Leaf, BANKING, 1926 p. 102).

Any Bank who behaved as Keynes believed they carried on business would go bankrupt within weeks. But the view out to the real world from the High Table at Kings College Cambridge is clouded by fog.

Not only did Keynes believe this mystical nonsense but also Professor Milton Friedman. He is also joined by hundreds of other professors including some who erroneously claim they are “Marxists”.

The late Professor Cannan, who opposed Keynes from the first, described it as “The mystical school of banking theory”.

A much more apt description would be “The loony school of economists”.

If the theory were true, Major Douglas, leader of the Social Credit movement in the 1930’s, would have been quite right to claim, as he did, that the Banks have the power to create unlimited wealth at a stroke of a pen.

How was it that Keynes could convince himself that Banks have this mysterious power to create wealth and control prices?

He did so by using the argument that defied the principles of logical reasoning.

Remember that Keynes was supposed to be explaining how the real world of banking operates.

But he made two assumptions that can only be described as rigging the argument so that it appeared to prove what he wanted to prove.

We are not suggesting that he deliberately or consciously rigged it. He really did believe that banks have this power and really did believe that his assumptions were innocent and valid.

In the real world there are scores of banks, but he said “let us assume that there was only one Bank”.

And his second assumption was that while depositors deposited cash in this one Bank, no depositors ever took cash out of it.

In the real world depositors are withdrawing cash from their Bank all the time. In fact an institution into which depositors deposit cash but do not take deposits out is no Bank at all.

To show how silly the argument used by Keynes is, we make two similar assumptions. In using these assumptions we can show that the man going around as Tony Blair is not Mr Blair at all but Horace Walpole.

There has been scores of Prime Ministers but let us assume that there is only one.

Secondly, let us assume that while the Prime Minister goes into no 10 Downing Street, no Prime Minister comes out again.

Then Mr Blair is Horace Walpole.

But according to Keynes there is nothing wrong with our logic.

What of the other members of the Macmillan Committee who sat with Keynes to produce the mystical school of banking for the consumption of politicians? Did they really all agree with him?

To which the answer is that they did not. Though they all signed the Report.

Two members of Reconstituted Socialist Party of Great Britain (1991) approached the members of the Macmillan Committee and found out that about half of the committee did not agree with that paragraph of the report.

Three of them admitted that they never bothered to read the paragraph though they were signatories to the Report.

One member of the Committee who totally disagreed with Keynes said that he was under instructions to sign the Report. He also said, about the other members, that they were afraid to stand up to a man with the high reputation which Keynes enjoyed.

He declared that if Keynes had declared that the Earth is flat they would have agreed to.

Such is the intellectual rigour of the ruling class.

The moral of all this is that you should not believe that something is true because a University Professor says it is true.

There is no economic theory so illogical, so absurd and so contrary to the evidence that you can find hundreds of economists prepared to believe it and politicians prepared to turn it into government policy.

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Theoretical Errors and some Misconceptions of Marx

Having shown that the Keynesian’s cure for unemployment does not work, we now come to the basic theory which led Keynes astray.

We can agree with Keynes that if the whole population spent more on buying all the commodities of industry, factories would be working to capacity and unemployment would fall.

But is the failure to buy sufficient commodities due to the whole population nit being large enough or to some other cause?

J. A. Hobson, by whom Keynes was influenced, said that it is total income in the country is insufficient.

Major Douglas, founder of the Social Credit Movement put it in the form:

“The capitalists and the workers together cannot buy all that is produced”

His remedy was that the government should pay out an additional income to everybody –what he called “national dividend”.

Keynes’s remedy was more spending by the government and less saving. He got enormous publicity in 1931 by saying that:

“Whenever you save 5 shillings you put a man out of work for a day” (OBSERVER 1931).

We have already dealt with the fallacy of more government spending to reduce unemployment but what about “less saving”?

Keynes addressed his appeal to the wrong class –the workers! Of necessity, the workers always spend almost all their income.

But the deficiency of the theory of purchasing power itself is false. Hobson, Douglas and Keynes all had it wrong.

In capitalism there is not and never can be an overall deficiency of purchasing power. The working class are restrained within the wages system which rations their consumption to what it takes to reproduce their ability to work. And as we have seen, the purchasing power of the working class actually increases before a trade crisis.

So what causes periodical crises?

Marx provided the explanation. It is that in certain situations some capitalists, who could go on buying raw materials, machinery, factory space and employing workers, choose not to do so, because there ceases to be profit in it.

So the cure offered by Hobson, Major Douglas and Keynes are all misdirected.

Unfortunately this deficiency of purchasing power theory as a cause of crises has been mistakenly attributed to Marx.

It comes in various forms.

One is that capitalists have to export because of a shortage of purchasing power in the home market.

In 1985, for example, British capitalism exported goods to the value of £78,000 million. If it was caused by a shortage of purchasing power in the home market, who was it who bought imports to the value of £80,000 million?

Louis Boudin, who wrote a good book on Marx –THE THEORETICAL SYSTEM OF KARL MARX (1907), went haywire over the question of exports.

He said that no capitalist country could continue on exporting to another capitalist country. He picked this nonsense up from Rosa Luxembourg, who, in her THEORY OF ACCUMULATION (1913) completely misunderstood Marx’s “reproduction schemta” he had outlined in the second volume of CAPITAL.

Luxemburg and erroneously believed that the only way capitalism could survive a “permanent break down” was to export to pre-capitalist countries.

And when primitive countries become capitalist, each capitalist country suffocates under a mountain of unsaleable commodities. This is what she taught at the SPD party school:

“The more capitalist production replaces less advanced forms of production, the more the necessity for profit limits the existing firm’s ability to satisfy their need to expand their markets. One way of making this clear is to imagine for a moment that everything on the whole earth that was produced was produced capitalistically, that is to say, solely by private firms in large factories with modern wage workers. As soon as we do this, the impossibility of a permanent expansion of capitalism becomes clear” (WHAT IS ECONOMICS? In A Waters (ed), Rosa Luxemburg speaks (new York 1970).

That was nearly a hundred years ago and world trade was enormously greater than it was then.

Another form of the fallacy is that crises happen because workers cannot buy back all that they produce. As a fact of course the workers cannot, but it is not workers but capitalists and governments who buy factories, merchant ships, aeroplanes and warships.

If the theory were true there could never be a boom. Capitalism would be in “chronic and permanent depression all the time”.

Another form of the fallacy is that crises happen because the workers restricted wages do not allow them to maintain their buying of consumer goods.
This argument was first put forward by the utopian socialist, Sismondi. This was known to Marx and he ridiculed it.

Marx pointed out that every crises is preceded by a period of boom in which the wages of the working class not only rise, but give them a larger share of consumer goods.

As he said, if the theory were true this ought to obvert the crisis.

Marx was not the only economist to be misrepresented. In fact, so was Keynes. His followers been engaging in massive inflation, misleadingly blaming the working class, but Keynes was against it.

His aim, he said, was stable prices and gradually rising wages.

To misquote him: “In the long run all economic reforms are dead”.

Now we want to deal with something Marx and Reconstituted Socialist Party of Great Britain (1991) do say. It is that the future socialist society will have no buying or selling. All members of society will have free access to all that is produced. Goods will not be produced for the market but solely and directly for use.

Many people who find the Marxist criticism of capitalism convincing cannot see why the alternative to capitalism has to take this form.

Marx’s technical answer was that the way wealth is distributed in any system of society is a consequence of the mode of production of that society.

In capitalism the means of wealth production are owned by the capitalist class. Wealth is produced by a non-propertied working class. Sale of commodities through the market predominates and distribution takes the form of profits, interest and rent to one class and wages to the other.

In capitalism commodity production and exchange for profit dominates everything.

How much shall be produced is not determined by the powers of production but by how much can be sold at a profit. If what is produced cannot be sold for a profit, capitalism ceases to produce.

In every trade depression great quantities of means of production are destroyed. Bricks, for example, are stockpiled, deteriorate in the weather and are rendered useless for future construction. Millions of workers are kept idle through unemployment.

When capitalists miscalculate the size of the market, or governments, for political reasons, produce without regard to the market, you get unsaleable commodities and the result is wheat mountains, butter mountains and wine lakes.

There is nothing new about this. Marx and Engels were writing about it 160 years ago in the COMMUNIST MANIFESTO.

Referring to commercial crises they wrote:

“In these crises a great part, not only of the existing products, but also of the previously created productive forces, are periodically destroyed”.

Numerous schemes for controlling or regulating the market have been tried, particularly with the production of coffee, oil and tin. They all fail.

The only way out is to change the mode of production. With the establishment of common ownership and democratic control of the means of production by all of society, production for the market disappears and along with it the price mechanism, the buying and selling of labour power and the wages system.

Of course free access to the products of industry will not be possible until production has been greatly increased. Capitalism, as Marx showed, has become what he called “a fetter on production”.

With the abolition of capitalism it becomes possible to get the expansion of production by making full use of the powers of production.

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Marx, Reformism and Reconstituted Socialist Party of Great Britain (1991)


Having dealt with the economic theories of the Keynesians, the Monetarists and Marx there remains to be considered where the Reconstituted Socialist Party of Great Britain (1991) stands in relation to all of them.

To start with Reconstituted Socialist Party of Great Britain (1991)is the only Party which never supported either the Keynesians or the Monetarist economic theories.

The next question is where do Keynes, Professor Milton Friedman and Marx stand politically in relation to capitalism?

Keynes and Professor Friedman are reformers whose aim is to reform capitalism in order to save it. Keynes said that he wanted “to save capitalism from revolution”, while Friedman stated that his aim was “to save democratic Western society from dictatorship on the Russian model”.

Marx, who understood capitalism better than either of them reached the opposite conclusion; that capitalism must be abolished in the interest of the working class and social progress.

But what happens in the meantime until capitalism is abolished consciously and politically by a socialist working class majority?

It was Marx who pointed out that capitalism is “no solid crystal, but an organism capable of change, and is constantly changing”.

As techniques of production develop and under pressure of competition and working class resistance capitalism has to keep on adapting itself to new conditions.

Keynes and Milton Friedman belong to a long line of social reformers of capitalism. The are in a descent from Wilberforce and the slave trade, Tory politicians who first legalised Trade Unions in 1826 and followed it with numerous Trade union Acts down to Mrs Thatcher and John major; the politicians who passed laws giving the workers the vote; the Tory politicians who passed the fist Act giving the government power to nationalise the railways in 1844; and the Tory and Liberal politicians who nationalised Posts, Telegraphs and telephones down to the privatisation policies of the post 1979 Tories and 1997 Blair government.

They are part of the social reform movements of the 20th century; the politicians who legislated on social employment problems; housing for the workers; Lloyd George with his Old age Pensions and unemployment insurance in 1911; Winston Churchill with his minimum wage Acts for the sweated trade; and the various Acts of Parliament reforming Local Government such as the Tories setting up the London County council in 1886 and their abolition of it some 100 years later.

The next development was the creation all over Europe of the Social Democratic Parties including the Social Democratic Federation in Britain.

They were formed under the influence of Marxist economic theories and their declared interest in the establishment of Socialism.

They set out to organise the working class and to gain control of Parliament, made possible by the extension of the vote to workers.

There were two flaws in their organisation which were to prove fatal.

Though their aim was Socialism, they all had, in addition, long programmes of reforms of capitalism.

And they were also seeking power prematurely – that is before the working class became socialists.

Marx and Engels accepted these two defects and did not see that they would essentially destroy the socialist aim of the Social democratic Parties and turn them into ordinary capitalist reform parties.

The British Labour Party illustrates this process of degeneration although they never stood on a Socialist platform. They are now just an alternative to the Tories and the Liberal Alliance as a Party committed to the preservation of British capitalism.

Now we come to Reconstituted Socialist Party of Great Britain (1991).

Reconstituted Socialist Party of Great Britain (1991), at its formation, evolved an entirely new revolutionary policy. We rejected entirely the conception of gaining political power prematurely.

For Reconstituted Socialist Party of Great Britain (1991), the absolute necessity is a working class won over to Socialism.

Reconstituted Socialist Party of Great Britain (1991) aimed to use the vote and Parliament – but only for Socialism. We rejected the whole idea of having a programme of reforms or immediate demands. Reconstituted Socialist Party of Great Britain (1991) has only one ain-Socialism.

Reconstituted Socialist Party of Great Britain (1991) is not in the business of seeking reforms of capitalism. As it was it in the early issues of the SOCIALIST STANDARD: “we do not advocate reforms, or defend reforms or oppose reforms”

The first issue of the SOCIALIST STANDARD, in September 1904, gave as one of the reasons for breaking away from the SDF, that the SDF had degenerated into an organisation seeking “free maintenance for school children”.

It is worth looking at how capitalist reforms and the Social Democratic Parties have fared.

The capitalist reforms have been completely successful in the aim of reforming capitalism and preserving it. The world is now divided into some 200 nations –all of them run on capitalist lines; that is production for profit.

The Social democratic reforms have been a total failure. The only way they could prove the success of their policy would be to show that they have achieved Socialism, or at least bought Socialism nearer.

There is no Socialism in the world and the Social Democratic Parties, including the British Labour Party, have forgotten all about their supposed aim of establishing what they considered to be “socialism”. The Labour Party has no other object than to continually reform capitalism in the interests of the capitalist class. It has followed every conceivable economic and political fashion and now embraces free trade, neo-liberal economics and free markets.

Of course they will claim that though they have done nothing for Socialism, that they have reformed capitalism and improved the lot of the working class.

Socialists challenge this claim.

We know of no reform of capitalism introduced by the Labour Party and similar parties useful to the working class, not supported by openly capitalist parties and introduced by them.

The vital importance of a principled Socialist political party aside, there is just one class organisation which has been useful to the working class. That is, the trade unions in their struggle to maintain and improve wages and salaries.

And what is the record of the Labour party about wages?

Every Labour government from Ramsey MacDonald to Blair has found themselves in conflict with the trade unions. The labour government has constantly tried to prevent wages from rising which they knew, would endanger the profits of British Capitalism.

The labour government of 1974-79 ended in what is called “the winter of discontent”.
While prices were rising by about 10% the Labour Government was trying to hold wages down to 3%. There were power 1,000,000 workers on strike against the government policy. The same conflict between Labour Parties and unions has been seen in past decades in Spain, France and Germany.

Since the labour Government returned in 1997 there has been attacks on the Fire Brigade Union, the threat by Gordon Brown to use interest rates against the working class if they push for higher wages and assaults of the pay and working conditions of civil servants and Local government employees.

The revolutionary policy of Reconstituted Socialist Party of Great Britain (1991) is the only one deserving working class support; that is Reconstituted Socialist Party of Great Britain (1991) policy of advocating the single aim of establishing Socialism.

Published as a tenth anniversary commemoration of Edwin Hardcastle’s (Hardy) death on June 19th 1995. The paper is taken from a lecture he gave on behalf of Reconstituted Socialist Party of Great Britain (1991) on Sunday 29th March 1987 at Marchmont Community Centre when he was 87 years old. Some of the original text, hand-written in note form-has been altered for the purpose of publication. Hardy was expelled with other comrades from the so-called Socialist Party in 1991 for taking political action in the name of the Party. His papers and library were handed to Reconstituted Socialist Party of Great Britain (1991) on his death.

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