Socialist Studies Socialist Studies

Reconstituted Socialist Party of Great Britain (1991) Summer School Lectures - Marx, Sismondi and Theories of Under-Underconsumption


This part of the SPGB’s Summer school dealing with Marxist Economics and Crises is to look critically at the under-consumptionist theory of crisis. The theory pre-dates Marx’s study of capitalism but lived on after his death and is still popular today.

What is an under-consumptionist theory of economic crises? The phrase is a bit of a mouthful. Yet the thinking behind the expression is quite simple but also simply wrong.

Some writers for example, including Major Douglas and J.M. Keynes, have argued that there is an overall shortage of purchasing power in capitalism and that this is the cause of trade crises and depressions. Douglas proposed that the government should distribute to the population a cash “national dividend” to correct the supposed shortage.

Keynes maintained that this overall shortage of purchasing power made it impossible to sell all the commodities of industry in the home market, hence the pressure to sell abroad. And that if home demand is increased by the adoption of his proposals pressure to export would disappear and thus remove a major cause of war.

In fact, the failure of some commodities of industry to find buyers, which produces a crisis, is not due to any overall shortage of purchasing power but it is due to the failure of capitalists to buy commodities owing to the uncertainty of being able to sell in the market and realise a profit. Crises and unemployment arise out of the anarchy of capitalist production and exchange for profit not the inability of workers and capitalists to buy back what they produce.

One way of understanding Marx’s criticism of the under-consumptionist theory is to place it in an historical context. Not all the variations of the theory can be dealt with in a short talk such as this. Instead a broad historical perspective can be shown beginning with Sismondi and Rodbertus and ending with Rosa Luxembourg and Keynes.

Why is a critique of these theories important? Haven’t we more important and practical things to do than rake over the writings of men and women long dead?

Unfortunately these theories have generated two pernicious political legacies which impinge on Socialism and the working class which have to be challenged and shown to be logically and politically erroneous.

The first political legacy is the belief that government or the banks can control the economy to create conditions of market equilibrium and harmony. The second belief is that over time capitalism will either come to a grinding halt with either Socialism emerging from its wreckage or collapse into a state of barbarism.

The reason why Socialists reject these explanations of economic crises is identical to Marx’s rejection of Sismondi’s theory of under-consumption and Engels’s repudiation of Rodbertus’s theory of under-consumption when editing the second volume of Capital. And the reason is simple. All these theories, if adopted as part of a political programme, lead to the politics of social reform not social revolution.


One of the first economists to consider and propose an under-consumptionist theory and a general theory of crises was the Swiss economist de Sismondi (1773-1842).

Sismondi worked within the economic tradition started by the economists Adam Smith (WEALTH OF NATIONS 1777) and David Ricardo (ON THE PRINCIPLES OF POLITICAL ECONOMY, 1817). But as the social problems of an emerging capitalism became clear to him, Sismondi broke with free trade and economic liberalism to become one of its trenchant critics.

Marx considered Sismondi, alongside Ricardo, to be the last of the classical economists. According to Marx, after Ricardo and Sismondi there was only vulgar economics on the one hand and a socialist critique of political economy on the other. A useful introduction to Sismondi can be found in A HISTORY OF ECONOMIC THOUGHT by I.I. Rubin (Chapter 37 Sismondi as a Critic of Capitalism, pp 335-346 Pluto Press1980) and in Rosa Luxemburg’s THE ACCUMULATION OF CAPITAL Section II, ch. 10-15 pp 145-194, 1913).

Apparently, there is no English translation of Sismondi’s Nouveaux Principes d’economie Politique (1819) although a selection of his writings can be found in POLITICAL ECONOMY AND THE PHILOSOPHY OF GOVERNMENT; A SERIES OF ESSAYS SELECTED FROM THE WORKS OF M. DE SISMONDI WITH AN HISTORICAL NOTICE OF HIS LIFE AND WRITINGS by M. Mignet (London: John Chapman, 1847). The free market on-line Library of Liberty has a collection of Sismondi’s works from the aforementioned publication.

A candidate for a vulgar and apologetic economics was Parson Malthus. He offered a theory of under-consumption in his PRINCIPLES OF POLITICAL ECONOMY (1820). He believed that there could never be effective demand for commodities because workers were unable to consume all they produced.

He wrote: “the very existence of a profit upon any commodity presupposes a demand exterior to that of the labour which has produced it” (cited by Marx in THEORIES OF SURPLUS VALUE Part 3, p. 57). Malthus opposed any increase in wages which would be expected from a defender of the ruling class.

Marx retorted:

Malthus is interested not in concealing the contradictions of bourgeois production, but on the contrary, in emphasising them, on the one hand, to prove the working classes is necessary (as it is, indeed, for this mode of production) and, on the other hand, to demonstrate to the capitalists the necessity for a well-fed Church and state hierarchy in order to create an adequate demand for the commodities they produce..” (loc cit op, 57).

For Sismondi, Capitalism not only encouraged the development of the forces of production but was steadily impoverishing the emerging working class within the cities and the peasants in the country-side, a class who formed the great majority of the population in Europe at the time.

The introduction of machinery and the overall growth in the productivity of labour, as well as the ruin of the peasants and small artisan producers, was producing what Marx called the industrial reserve army of the unemployed. The unemployed were, in turn, driving down the wages of the employed workers to the barest subsistence.

Sismondi believed that as capitalism developed, industrial production without limit was bound to collide with the limits placed on effective demand arising from the growing impoverishment of the great majority of the population. This contradiction, Sismondi thought, would lead to an economic crises caused by a general overproduction of commodities. He called them “gluts”.

During the first decade of the 19th century, the economic crises that hit British capitalism were still explained from external causes. Reasons were given by economists for economic crises such as the disruption of trade with continental Europe caused by the wars between post-revolutionary France and Britain. And the existence of mass unemployment in Britain after the end of the Napoleonic war in 1815 was explained away by economists as the result of the curtailment of military production.

Ricardo referred to these phenomena as a sudden change in the channels of trade and nothing to do with commodity production and exchange for profit and the workings of the market. However, in opposition to Sismondi, Ricardo and his capitalist supporters insisted that under peaceful conditions of capitalist development a “general glut” of commodities could not occur.

This belief in the market was to become for James Mill and J. B. Say (A TREATISE ON POLITICAL ECONOMY, 1803) the maxim “that every seller bought a buyer to the market”. For Ricardo and the capitalists who used his ideas against the working class, capitalism production and exchange were seen as harmonious and self-adjusting.

Marx criticised Ricardo and his supporters for attempting to “reason away” the contradictions of capitalism, locating the source of their error to the way in which they conveniently ignored the very process of commodity production and exchange for profit, with the important distinctions between use-value and exchange value and between the commodity and money (THEORY OF SURPLUS VALUE Part 2 pp 495 and 502). Marx was also to dispose of Say’s Law in the first volume of CAPITAL where he wrote:

but no one is forthwith bound to purchase, because he has just sold…if the split between the sale and the purchase becomes to pronounced, the intimate connection between them, their owners, asserts itself by producing – a crisis” (CAPITAL VOL. 1 Ch. III, pp 113-4).

Later, Marx was to dismiss Ricardo’s argument with this reply:

When , for instance, the market is glutted by shoes or calicoes, or wines or colonial products, does this perhaps mean that four-sixths of the nation have more than satisfied their needs in shoes, calicoes etc? What after all has over-production to do with absolute needs? It is only concerned with demand that is backed by the ability to pay. It is not the question of absolute over-production –over-production as such in relation to the absolute need or the desire to possess commodities. In this sense there is no partial nor general over-production; and the one is not opposed to the other” (THEORIES OF SURPLUS VALUE Part II, chapter XVII page 506).

In 1825, two years after the death of Ricardo, Sismondi was vindicated when the first global economic crisis broke out that could not be traced to a war, blockade, crop failure or to some other non-economic “external shock.”

Twelve years later, in 1837, a second similar crisis broke out that had even more devastating effects than the first crisis. Capitalism’s industrial cycle of “a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation” (Marx, WAGES PRICE AND PROFIT in SW1, p. 440) had begun.

Marx criticised Sismondi’s theory of under-consumption to explain the crisis. Nevertheless, he acknowledged that Sismondi was aware of the contradictions of capitalist production; the unrestricted development of the productive forces and the restriction imposed on consumption of the working class by the profit motive (THEORIES OF SURPLUS VALUE Part II, page 57-58). Marx went on to praise Sismondi for arguing against Ricardo that crises were not “accidents” but “essential outbreaks...” (loc cit)

Sismondi’s under-consumption ideas related to his “solutions” to the economic crisis; the first, for the government to intervene to bring the forces of production in line with capitalist relations of production, second, for the State to increase effective demand in relation to the level of the productive forces and third, to increase distribution in relation to production.

Marx makes this final point against Sismondi:

He forcefully criticises the contradictions of bourgeois production but does not understand them, and consequently does not understand the process whereby they can be resolved” (loc cit p. 56). And that would be the conscious and political abolition of capitalism by the working class.

Raising wages will not stop economic crises.

Karl Rodbertus economic theory proceeds from two main ideas: a labour theory of productivity, and a belief in a decreasing wage share. The second idea is connected with the so-called iron law of wages, often mistakenly attributed to Marx but held in fact by Frederick Lassalle. Putting these two main ideas together, Rodbertus emphasized the prob¬lem of “distributive justice”, and evolved a theory of crises from a belief in capitalist’s tendency to produce more than the working class could consume.

Like Sismondi, J. K. Rodbertus was well aware of crisis, in fact more so. In his first LETTER ON SOCIAL PROBLEMS of 1850 (published in English as OVERPRODUCTION AND CRISIS by Swan Sonnenschein in 1898) he gave a detailed description of the four economic crises in 1818-19, 1825, 1837-9 and 1847.

Rodbertus formulated a business cycle recurring at ever shorter intervals with ever increasing severity which anticipates the Russian economist Kondratieff and the belief had by many Trotskyist groups of capitalism coming to a grinding halt. He remarked that all crises came after a boom period and rejected the view of the classical economists that there is market harmony within commodity production and exchange for profit.

Whereas Sismondi saw the problem of crises as a result of the development of the forces of production without regard to the limitations of incomes, Rodbertus believed that the problem stemmed from the workers declining wage rate. Again a critical overview of his ideas is provided in Luxemburg’s THE ACCUMULATION OF CAPITAL (Section II ch 16-18, pp 214-246).

Rodbertus thought that the wages of labour form an ever diminishing part of the national product even though productivity was increasing. For Rodbertuus the declining wage rate was the cause of the problems of society including immiserisation of the working class and periodic economic crises.

In the 1870’s the ideas of the economist Rodburtus (OVERPRODUCTION AND CRISIS London 1898) was having some influence on the trade unions and the German SDP in Germany. Rodbertus was influential in the rise of what came to be known as “State Socialism” which Engels tore to pieces in ANTI-DURHING. Like Sismondi, Rodbertus felt an obligation not only to de¬scribe the economic cycle and identify its causes, but also to suggest remedies.

In his theory of distribution, Rodbertus proposed that means of production should be nationalized and unearned income should be eliminated. Instead, income should be dis-tributed in proportion to the labour of each worker. He argued for a “public authority” to direct a state capitalism according to the needs of the whole population (see pp 79-80).

Engels, in his chapter on ‘Production' in ANTI-DURHING, attacked Duhring's under-consumptionist interpretation of capitalist crisis on these very grounds. He pointed out that the restricted consumption of the masses is a permanent feature of capitalism.

"But unfortunately the under-consumption of the masses, the restriction of the consumption of the masses to what is necessary for their maintenance and reproduction, is not a new phenomenon. It has existed as long as there have been exploiting and exploited classes. Even in those periods of history when the situation of the masses was particularly favourable, as for example in England in the fifteenth century, they under-consumed. They were very far from having their own annual total product at their disposal to be consumed by them. Therefore, while under-consumptionism has been a constant feature in history for thousands of years, the general shrinkage of the market which breaks out in crises as a result of a surplus of production is a phenomenon only of the last fifty years;" (pp. 395-396).

The point Engels is making is that capitalist production has never produced enough to meet the needs of all society. It does not exist for that purpose.

When editing the second volume of CAPITAL Engels inserted into the text a passage Marx had written against Sismondi one of the early advocates of under-consumption. He wanted to show the fallacy of Rodbertus’s theories and deal a theoretical blow to the: “prospective supporters of Rodbertus’s theory of crisis”.

Marx wrote against Sismondi:

"But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and "simple" (!) common sense, such a period should rather remove the crisis. It appears, then, that capitalist production comprises conditions independent of good or bad will, conditions which permit the working-class to enjoy that relative prosperity only momentarily, and at that always only as the harbinger of a coming crisis" (CAPITAL VOLUME II).

And this is borne out in all crises. In a boom workers are in fact receiving more wages and are buying more commodities. Yet a crises still takes place rendering under-consumptionist theories ineffectual. So how can State intervention as proposed by Rodbertus prevent crises? It can’t.

Rosa Luxemburg’s Theory of Crisis.

One of the first under-consumptionist theories within a so-called Marxist framework was set out by Rosa Luxemburg in her book THE ACCUMULATION OF CAPITAL (1913) based on Marx’s reproduction models in the second volume of CAPITAL (Chapter XXI Accumulation and Reproduction on an extended scale p. 493 – 527).

The first English edition of her work was not published until 1951 with a long and rambling introduction by the economist Joan Robinson.

In the last chapter of her book, Militarism as a Province of Accumulation, Luxemburg stated that as capitalism develops it:

becomes a string of political and social disasters and convulsions, and under these conditions, punctuated by periodical economic catastrophes or crises, accumulation can go on no longer” (p. 447).

Luxemburg concluded that capitalism is the first social system in human history which is unable to exist as a mode of production in its own right. Once it has exhausted the non-capitalist areas of the world “it must break down” (loc cit).

And as capitalism nears breakdown, she believed:

it becomes a necessity for the international working class to revolt against the rule of capital” (loc cit)

Luxemburg’s thought capitalism would collapse because of an inability of capitalists to sell all the commodities that were produced.

She wrote:

the decisive fact is that the surplus value cannot be realized by sale either to workers or to capitalists, but only if it is sold to such social organizations or strata whose own mode of production is not capitalistic” (loc cit p 86).

Within the capitalist economy the expenditures of capitalists and workers could not for any lengthy period be sufficient to permit continuous realization of surplus value generated from capital accumulation.

For Luxemburg:

the political expression of the accumulation of capital in its competitive struggle for what remains still open of the non-capitalist environments” (p. 426).

In short, capitalism could only keep going if capitalists were able to sell commodities and make a profit in non-capitalist areas of the world. Once capitalism reached a truly global social system it would collapse.

These views were never held by Marx but she claimed Marx as a starting point.

She begins her analysis by critically analyzing Marx’s famous schemata of reproduction between the means of production and the consumption of commodities. This is set out in the last chapter of volume 2 of CAPITAL.

Marx wanted to show how it is possible for Capital to dominate the entire economic life of a society. In other words, how the relationships of the capital and the labour process in the first volume of CAPITAL, asserted themselves at the level of social production of capital as a whole.

This is why the subtitle of the second Volume of CAPITAL is, in fact called "the process of the circulation of capital" and not, for example, "the process whereby Capital finds its equilibrium" or "the process by which Capital ensures economic growth".

Marx is not trying to find the necessary conditions for total supply and total demand to balance; he is rather seeking to specify the necessary conditions for the accumulation of Capital

Luxemburg wrote of how it is nearly impossible for different elements of the economy to balance each other, how the “swings from overstrain to exhaustion' that shake the economy, and how 'glut or shortage are bound to occur which lead to gluts and shortages in all other areas”. Yet, despite the anarchy of commodity production, the system had expanded and grown.

There are a number of serious problems with Luxembourg’s account of capitalism’s breakdown.

First, since she wrote her book, capitalism has expanded to become a globalised world market but it shows as little likelihood of collapsing now than it did in 1913. She ignored the role of new investment by capitalist firms in realising already-produced surplus value and thereby ensuring the possibility of capitalist economic expansion.

And capitalism survived two major world wars and did not collapse into the “barbarism” –that is a slide back to an earlier social system-a regression she believed would occur. Capitalism has proved resilient absorbing death, destruction and human misery while firmly chaining the working class to capital to produce surplus value and profit.

Second, she misunderstood Marx’s reproduction schemes which were meant to illustrate certain fundamental aspects of the reproduction process. Marx made this clear in the first paragraph. He recalls that in the first volume of CAPITAL he has shown how accumulation works for one single capital. He now intended to “show the annual reproduction as a whole” (493). But it is not until the third volume of CAPITAL that he discussed production and circulation in its entirety.

Third, she presumed that capital accumulation was driven by the demand for consumption rather than to expand production without regard to the limits of the market.

However, capital accumulation as an anti-social pursuit in its own right is a tendency imposed upon each and every individual capitalist by the pressure of competition and which is driven by the constant revolutionizing of the forces of production.

Marx had explicitly stated this point when he wrote:

Only as personified capital is the capitalist respectable. As such he shares with the miser the passion for wealth. But that which in the miser is mere idiosyncrasy, is, in the capitalist, the effect of the social mechanism, of which he is but one of the wheels. Moreover, the development of capitalist production makes it constantly necessary to keep increasing the amount of the capital laid out in a given industrial undertaking, and competition makes the immanent laws of capitalist production to be felt by each individual capitalist, as external coercive laws. It compels him to keep constantly extending his capital in order to preserve it, but extend it he cannot, except by means of progressive accumulation” (CAPITAL VOLUME I, Ch. XXIV, p. 592)


Accumulate, accumulate! That is Moses and the prophets!...Accumulation for accumulation’s sake, production for production’s sake..” (CAPITAL VOLUME, Ch. XXIV, p. 595).

Marx rejected theories of under-consumption because he understood that capitalism is based, not on production for consumption, but on production for profit. In their pursuit of profit, individual capitalists invest the surplus value exploited out of their workers to create more profit.

Marx pointed out that under capitalism there was always under-production. There is always the un-met need of the working class whether wages are high or low because the priority of capitalist production is capital accumulation and profit. Workers’ needs under capitalism are not met and are restricted precisely because they do not own the means of production.

How can raising wages or re-distributing income get around the real reason why companies are not finding buyers for their commodities; firms are going bankrupt and unemployment is rising? Capitalists do not employ workers to give them a job, or to permit them to consume, but simply to extract surplus value from their unpaid labour.

Fourth, Socialism cannot come out of social chaos. Socialism requires the conscious political action of the working class to replace capitalism with socialism. Socialism requires to be established under stable conditions to allow production to be extended and continued, no longer for making profit but in meeting human need.

Rosa Luxembourg’s under-consumption theory spawned some bastardised versions a few of which have been given an airing in MARX'S THEORY OF CRISIS (ch 2 pp 53-58 1994) by the academic Simon Clarke. These eccentric but anti-Marxist theories have either justified the dictatorship of what was once the Soviet Union or encouraged the erroneous belief that the State can abolish the trade cycle.

Proponents of the under-consumption theory tend to focus on effective demand as the limiting factor in capitalist accumulation. In Marx’s own analysis, however, effective demand is not an intrinsic problem.

On the contrary, capitalists are driven to accumulate as rapidly as possible, so that self-expanding reproduction, not stagnation, is the normal tendency of the system. This does not imply that the accumulation process is smooth, or that crises do not occur. But it definitely does imply that the limits to the accumulation process do not arise from an insufficiency of demand.

In fact, Marx states:

The real barrier of capitalist production is capital itself” (CAPITAL VOLUME III, p. 251).

Marx did not believe that the economic collapse of capitalism is inevitable. He wrote: “Permanent crises do not exist” (THEORY OF SURPLUS VALUE Part II page 497n).

There has never been a depression to date so long or as deep that the working class will not endure pay cuts, lowering in their conditions of work, social alienation, falling standards of living, support for fascism, blaming each other, anything but everything rather than organising consciously and politically for the establishment of Socialism. Until they do economic crises and trade depression will continue from one generation of the working class to the next.

Keynes and under-Consumption

In the depression between the two world wars, an increasing number of workers –and even some professional economists-were paying attention to the analysis of capitalism made by Karl Marx in his work CAPITAL.

Marx showed that capitalism was the cause of economic crises and that unemployment, and its rise to peak levels in periodical phases of trade depressions, arose out of the contradictions of commodity production and exchange for profit and are therefore inevitable while capitalism lasts.

This growing interest in Marx was all but extinguished with the publication in 1936 of J. M. Keynes’s THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY. Keynes argued that depressions are caused by a lack of effective demand.

Like Karl Marx, Keynes rejected Say’s law that “every seller brings a buyer to market”. Keynes saw that pro?ts did not automatically have to be spent and could be hoarded or saved. The result would be disequilibrium. Markets would not clear.

The solution Keynes put forward was adopted by most governments and capitalist political parties after the war; a policy lasting well into the 1970’s. One of Keynes’s disciples, Michael Stewart, an advisor to the SDP leader David Owen, wrote in his book KEYNES AND AFTER (Penguin 1968)

Whatever the qualifications the basic fact is that with the acceptance of the General Theory, the days of uncontrollable mass unemployment in advanced countries are over. Other economic problems may threaten; this one, at least, has passed into history” (p 254).

When Stewart wrote his 1985 edition after Monetarism had swept Keynesianism away the optimistic passage quoted above was quietly dropped.

Rather than mass unemployment it was in fact Keynes who became history..

From 1955 onwards unemployment in Britain started to increase. By 1963 it had risen to 747,000, to above a million under the Heath Government in 1972 and to 1,500,000 in 1976 under the Labour Government.

This was capitalism operating in its normal way. However, Callaghan’s Labour government thought it was the failure of Keynes’s doctrine that had caused unemployment and embraced the equally fallacious theory of Monetarism.

Although Keynes did not argue for inflationary measures he did advocate governments should increase the amount of money in circulation. This had disastrous consequences in the 1970’s with both high inflation and high unemployment.

From the late 1970’s Keynes became unfashionable to be replaced with first Monetarism then economic liberalism. The general price level was ten times what it had been in 1938.

With the failure of monetarism to arrest both the banking crisis and the current trade depression Keynes has come back into fashion.

The Labour administration and President Obama in the US along with the Chinese government have injected billions into their respective economies in the misguided belief it will effect the current economic depression.

• The Labour Government initiated tax cuts and spending of £20 billion.

• President Obama received Congressional ascent for a $778 billion stimulus for the economy and then pledged up to £193 to stem the wave of home possessions.

• China will spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports

The signs do not look promising. The first banking bale out by the Labour Government failed as did President Bush’s cuts in taxation and attempt to underpin the US banking system. Obama’s cash injection has stalled. And 20 million workers in China are currently unemployed.

And add to this the US car industry were given £11.9 billion but then had to ask for a further £15 from the US government. These car manufacturers are still making workers redundant across the world. And in March 209 the US unemployment figures were the worst since 1949 (INDEPENDENT 07.03.03).

Obama’s administration was also forced to spend billions buying a £60b stake in GM Motors

And recently the British government instructed the Bank of England to circulate billions of pounds of money into the economy via the Banks –so-called Quantitative easing. Some claim it will either create at best inflation at worst hyper-inflation or debase the currency.

Inflationary policy has been associated with Keynes. It is incorrect. Keynes once said that “it is better to be roughly right rather than precisely wrong” (THE LIFE OF JOHN MAYNARD KEYNES R. F. Harrod 1951).

When Keynes declared that it was no longer necessary “to watch and to control the creation of currency” (taken from E. Cannan, Currency or Limitations of Credit, THE ECONOMIC JOURNAL, March 1924 pp. 52-64 although the quotation can be found in Keynes’s A TRACT ON MONETARY REFORM 1923 p. 209) he was precisely wrong.

However, Keynes did not advocate the kind of continuous and massive inflation that has taken place since his death. In this he would have been “roughly right”. He would have opposed inflation as a policy had he lived.

What he did advocate was that in a situation of falling trade when capitalists have to cut their costs, trade unions would resist any reduction of money wages.

So he advocated a short period of inflation, on the assumption that the trade unions would tolerate some rise in prices without pressing for higher wages.

In fact, what has happened in the current depression is that some trade unions and workers have voluntarily taken wage cuts, gone on short time working or taken enforced “holidays”.

Keynes in the 1920’s, though, completely understood and accepted the Marxist view that an excess issue of an inconvertible paper currency puts up prices. There is no evidence that he ever changed his mind.

What he did hold was that there is no need to have formal control over the note issue provided that government controlled “credit”.

A basic fallacy of the Keynesians, in and out of the Labour Government, is that they do not face up to the fact that the government cannot increase government expenditure (which Keynes advocated as a means of causing an expansion of the economy) without getting the money from somewhere.

Our late comrade Hardy (Edgar Hardcastle) often asked Keynesians in debate and in correspondence where the additional government revenues were to come from and he received several different answers.

First, they said additional government revenues could come from increased taxation. But, obviously, if you raise more money by taxation it enables the government to spend more but it reduces the spending power of the people who have to pay the increased taxes.

Second, they replied that the revenue could be obtained by selling government securities to investors. But this also reduces the ability of investors to spend just like increased taxation.

Third, they stated that the revenue could come by the government borrowing from the banks by selling treasury bills. But to pay for these Treasury Bills the banks have to call in loans they have made in the money market. The money market then has a traditional “right” to go to Threadneedle Street and to borrow from the Bank of England.

Remember that when the Government borrows from the banks it spends the money, thus increasing the bank balances of companies and individuals unlike what happens when the Government increases taxation and spends that money.

Some of these increased bank balances are withdrawn from the Bank of England in cash, so the Bank correspondingly prints more notes to meet the increased demand. So it ends up with an increase note issue.

It is just the same as if the Government cuts out the intervening stage of borrowing from the banks and directly prints more notes and spends them. All additions to the note issue are credited to the government account at the Bank of England. It is a form of non-tax government revenue which costs only the cost of printing the notes.

So why did Keynes doctrines fail?

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 defense 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.

History treats Keynesianism with unsentimental savagery but it’s failure to deliver sustained full employment 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 was Keynesian.

But, and this is the crucial test, in every one of the 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 Labour Government finally goes out of office with unemployment at a higher rate than when the 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 old Keynes” or not.

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 raises 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 falling rate of employment enjoyed by the incoming Blair government of 1997 would have happened whatever government came to power. And the “Bust ” in the economy which Brown said would not occur again has happened despite the protestations of the Labour Government.

And capitalism will go its own way despite the policy pursued by the government of the day. Capitalist politicians cannot prevent “boom and bust”. When capitalists-those that are left in the market- see favorable conditions they will start investing capital again and exploiting workers in greater number bringing the unemployment level down.

From the perspective of the working class all this is totally unnecessary. Unemployed in conditions of poor trade and exploited in conditions of good trade workers are caught between the devil and the deep blue sea.

Far better to understand that capitalism can never be made to work in their interests and replace capitalism with common ownership and democratic control of the means of production by all of society.

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Socialist Studies

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