Marx, Keynes, Hayek and the Crisis of Capitalism

A recent BBC documentary series entitled “Masters of Money” examined the ideas of three historical giants in economics: Keynes, Hayek, and Marx. In this article, we compare and contrast their ideas in the context of the current crisis of capitalism, to see if any of these figures and their writings really do have the answers to solve the problems facing society today.

The fact that a prime-time television series examining these three political economists and their ideas about economic crisis has been made is a very telling sign of the times that we are living in. The current crisis – the deepest crisis in the history of capitalism – has led people to question the entire economic system and to search for answers as to how we can escape the crisis.

For decades, the economic doctrines of “laissez-faire” capitalism and of government regulated capitalism were presented as the only alternatives, especially after the collapse of the planned economy in the USSR and the supposed “end-of-history”. This “alternative” has frequently been presented as a simple battle between two sides: those who want to regulate markets and those who seek to set them free. The name of Hayek is typically associated with those who sing the praises of the free market and preach of the need to unchain the invisible hand of capitalism. Meanwhile, Keynesianism is back in vogue with those who look for government stimulus and greater regulation of the economy. A “Keynes vs. Hayek rap” has even been created to explain this battle of ideas, gaining millions of hits and spawning a sequel.

Today we hear calls for “jobs, investment, and growth”; words that have become the mantra of the labour movement leaders who promise an “alternative to austerity”. But the dichotomy of “austerity vs. growth” is a false one. These words are presented as polar opposites, but in reality they simply represent two ideological wings of the same capitalist class –monetarism and the Keynesianism – neither of which has a real solution to the crisis – a crisis of capitalism.

The global crisis that began in 2007-08 – and which has continued and deepened ever since – has caused many commentators to revisit and examine the ideas of Hayek and Keynes in search of an answer to the question of what caused the crisis and, perhaps even more importantly, how we can get out of it. But as the crisis enters its fifth year, more and more people are beginning to realise that it is not simply a question of “free market vs. regulation” or of “austerity vs. growth”, and are instead questioning the entire capitalist system itself. As a result, the ideas of Marx are gaining in popularity and an increasing number are saying “Marx was right”.

Who was Keynes?

It is ironic that Keynesianism has today become the dominant ideology within the labour movement, as Keynes himself was open about his capitalist class interests, saying that “the class war will find me on the side of the educated bourgeoisie”. He was openly opposed to socialism, Bolshevism, and the Russian Revolution, and he was an economic advisor and lifelong member of the Liberal Party, the classic party of British capitalism in the 19th and early 20th centuries.

Like all economic and political figures, Keynes was a product of his times; a product of certain historical, material conditions. Earlier representatives of bourgeois political economy, such as Adam Smith and David Ricardo, were the product of a capitalism that was not yet fully developed and was still playing a progressive role. Within the context of this immature capitalism, these “classical” economists could only take the understanding and analysis of the capitalist system so far. It was only with the further development of capitalism, and the accumulated mass of evidence and experience that went with this development, including the experience of repeated booms and slumps, that Marx was able to uncover the true nature of capitalism, such as the real processes and relations lying behind value and crisis, as Marx himself explains in Capital:

“In theory, we assume that the laws of the capitalist mode of production develop in their pure form. In reality, this is only an approximation; but the approximation is all the more exact, the more the capitalist mode of production is developed and the less it is adulterated by survivals of earlier economic conditions with which it is amalgamated.” (Capital, Volume III, chapter 10; Marx)

In many respects, Ricardo was the high point of bourgeois political economists. Marx described those who followed Ricardo as the “vulgar” economists, due to the crude way in which they twisted and turned in their attempts to explain and resolve the contradictions of capitalism without breaking from capitalism itself. Marx had explained the contradictions within capitalism that led to periodic crises; any attempts to abolish these contradictions without abolishing capitalism itself were doomed to failure.

Rather than taking political economy forward and developing a greater understanding of capitalism, later economic theorists went backwards. In particular, with the historical development of finance capital and the increasing separation between the owners of capital and the actual production process – a process that Marx had already begun to explain in great detail in Capital Volume III –an extremely subjective view of economics emerged. This individualistic and idealistic economic theory, known as marginal theory, threw away almost everything useful from the theories of Smith and Ricardo – since a thorough, materialist analysis based on these ideas inevitably led to the conclusion that capitalism was riddled with contradictions, as Marx had concluded – and instead embraced a one-sided view of capitalism in which everything was determined by the “invisible hand” of the market and the forces of supply and demand. These ideas reflected the growing role of banking and speculation – the rentier economy in which the bourgeoisie no longer directly owned the means of production and managed their own businesses, but were now simply investors looking to maximise the return on their capital in whatever way possible.

Keynes despised this rentier economy, which he saw as being a great destabiliser of the whole economic system:

“With the separation between ownership and management which prevails to-day and with the development of organised investment markets, a new factor of great importance has entered in, which sometimes facilitates investment but sometimes adds greatly to the instability of the system.”

And later:

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” (“The General Theory of Employment, Interest, and Money”, chapter 12; John Maynard Keynes)

For Keynes, the problem was not capitalism, but simply “laissez-faire” capitalism, in which unregulated markets and investors were left to pursue their own individual profit without any care for the rest of society, saying that:

“For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today.” (ibid, chapter 24)


“For my part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable.” (“The End of Laissez-Faire”, chapter 5, Keynes)

Keynes desired a return to the “good old days”, in which the capitalist class were “responsible” industrialists who invested for the good of their communities and society as a whole. In other words, Keynes wanted to turn the wheel of history backwards to an imaginary time of “responsible capitalism”. In this respect, one can see the appeal of Keynes’ ideas to the modern reformist leaders of the labour movement, who have completely accepted capitalism and abandoned any idea of transforming society. (Keynes even suggested a financial transactions tax, a demand that has become a key point in the modern reformists’ programme.) The same phrases are frequently heard today from the mouths of these reformist leaders, who blame “neo-liberal”, “unregulated”, “feral” capitalism for the crisis. But this is the real nature of capitalism as it exists; all attempts to regulate capitalism to being about a “kind” or “responsible” capitalism are utopian, as we have explained previously.

What is Keynesianism?

Keynes’ ideas changed throughout his life in response to the events around him, something he took pride in, famously responding to criticism that his views were inconsistent by saying, “When my information changes, I alter my conclusions. What do you do, sir?” These days, however, Keynesianism typically refers to the ideas of Keynes in the 1930s, and in particular his “General Theory of Employment, Interest, and Money” (often referred to simply as the “General Theory”), which is the basis for much of modern day bourgeois macro-economics.

The ideas presented by Keynes in his General Theory were also very much shaped by historical events; in particular by the Great Depression and the scourge of mass unemployment that was seen across the industrialised world, with permanently high rates of unemployment in the region of 10-25%. Keynes sought to find the answer for this phenomena, and, importantly, to find a solution. Previous bourgeois economists had sought to try and justify capitalism theoretically; such people were mere apologists of capitalism. Keynes, however, painted himself as a “pragmatist”, who was no longer simply trying to justify capitalism theoretically, but was trying to save capitalism practically – to save capitalism from itself.

Keynes saw his role as a member of the “educated bourgeoisie”, and the role of the state in general, to intervene in the running of capitalism and to regulate it – not in the interests of ordinary working people, but in the interests of capitalism itself – to overcome the contradiction between the interests of various individual capitalists and the interests of the capitalist class as a whole. In other words, Keynes wanted capitalism without its contradictions.

Contradictions and Overproduction

This contradiction, which arises due to the private ownership of the means of production – which in turn means production for profit and competition between different private individuals in pursuit of this profit – is at the very heart of capitalism, and is responsible for both the great historical progressiveness of capitalism and its great destructiveness.

As the BBC series “Masters of Money” correctly pointed out, Marx (and Engels) were not blind to the achievements of capitalism, nor did they romanticise feudalism and rural life (in fact, in the Communist Manifesto, Marx and Engels described capitalism as having “rescued a considerable part of the population from the idiocy of rural life”). Under capitalism, the competition between individual capitalists in pursuit of profit leads to a large part of this profit being continually reinvested in new research and development, new science and technology, and new means of production, in order to reduce costs, undercut competitors, and gain a greater market share. In its early days, therefore, capitalism was immensely progressive in its ability to increase productivity, develop the productive capacity of society, and create tremendous amounts of wealth. As Marx and Engels stated in the Communist Manifesto:

“[Capitalism] has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals.”

But this process of private ownership and competition contains the seeds of its own destruction. It is in the interest of the individual capitalist to pay their own workers as little as possible in order to maximise profits. However, these wages – and the wages of the workers employed by other capitalists – also form the demand for the commodities that capitalism produces, i.e. the market. Each individual capitalist would like to pay his/her workers as little as possible in order to maximise profits; but at the same time, he/she would also like his/her fellow capitalists to pay their workers as much as possible so that these workers can buy the commodities that are being produced.

Each capitalist is, however, trying to do the same thing; therefore, as individual capitalists compete against one another, trying to maximise their own profits, they cut the wages of the working class as a whole, thus reducing the market and destroying the basis on which they can sell their commodities and realise their profits. It is this interactive process of competition between many individual capitalists – each making decisions that are completely rational from their own individual perspective – that leads to an overall process that is distinctly irrational for the capitalist class as a whole.

Marx had long ago acknowledged and explained this inherent contradiction within capitalism – the contradiction of overproduction, in which the expansion of production in the pursuit of profit at the same time leads to a reduction in the ability for this profit to be realised. Those who came after Marx and who tried to find a solution to crises within the limits of capitalism were forced to ignore him and his ideas as far as possible, and instead sought to explain crises by looking at only one side of the problem. For Keynes, the main problem was the question of demand – or “effective demand” – as he referred to it; for Hayek, the key issue was the question of supply – in particular of the money supply.

Say’s Law

In order to try and explain the phenomena of the Great Depression and mass unemployment, Keynes had to break with many established assumptions from classical economy. In this respect, Keynes is attributed with having caused a “revolution” in economic theory. In reality, there is nothing new in what Keynes said, and most of his ideas had been expressed far more precisely, clearly, and thoroughly in the works of Marx and Engels; Keynes merely packaged his ideas in a way that was more palatable to the bourgeoisie.

In particular, Keynes attacked what is known as “Say’s Law”, attributed to Jean Baptiste Say (although not originally “discovered” by him), a French classical economist of the late 18th / early 19th century. Say’s Law is commonly referred to in terms of the idea that supply creates its own demand; that every seller brings a buyer to the market. Nowadays this same “law” is the basis for the “efficient market hypothesis” – the theory put forward by the most ardent supporters of the free market – that suggests that, if left to its own devises, in the long run market forces will solve all problems and will always find an “equilibrium” in which supply meets demand. But as Keynes was keen to point out, “in the long run we are all dead.”

Marx disproved Say’s Law long ago. (In fact, the presence of periodic crises is all that is needed to disprove Say’s Law!) In Volume II of Capital, Marx explained the accumulation and reproduction of capital that occurs under capitalism by means of a set of schema, in which the economy is divided into two sectors: department one, in which the means of production – i.e. capital goods or “productive consumption” – are produced; and department two, in which consumer goods, for the consumption of individual workers (or capitalists) are produced.

Marx showed that in an abstract theoretical sense, Say’s Law is actually true – the economy should be able to achieve equilibrium. But Marx demonstrated that this equilibrium could only be achieved on the basis of the capitalist class continually reinvesting profits into new capital goods – i.e. machinery, buildings, and infrastructure. On the one hand, this process is what allowed capitalism to play a historically progressive role for a period of time – to develop the means of production, both qualitatively in terms of new science and technology (and thus increase productivity), and also quantitatively in terms of its ability to produce a greater total mass of wealth.

On the other hand, this process also contains inherent contradictions: the “equilibrium” is an inherently unstable and temporary one, since these new means of production that are created must be put to work to create a greater mass of commodities, which in turn must find a market (i.e. demand) in order to be sold and for profit to be realised. In other words, capitalism achieves equilibrium in the short term, but only at the expense of creating even greater contradictions in the long term, and thus paving the way for an even larger crisis in the future. Keynes himself acknowledged this, saying that:

“Each time we secure today’s equilibrium by increased investment we are aggravating the difficulty of securing equilibrium tomorrow.” (“The General Theory”, chapter 8; Keynes)

However, unlike Marx, Keynes was not a thorough materialist and a dialectician, and thus did not fully draw the conclusions of this statement, as Marx had done many decades earlier – the conclusion that overproduction is an inherent contradiction within capitalism, resulting from the private ownership of the means of production and its drive to produce for profit.

Dialectical Materialism

The accumulation and reproduction schemas outlined by Marx in Volume II of Capital are precisely that: schemas; generalised abstractions of a complex process; long term averages, which cannot be achieved through a process of slow, smooth, linear change, but only through a dynamic and chaotic process – i.e. a dialectical process of contradictions and crises. In other words, these “equilibria” are dynamic equilibria – constantly being established and then broken – resulting from an infinitely complex process, rather than the static equilibria conceived of by the supporters of Say’s Law, who imagine the economy as a simple mechanical system, moving along like clockwork.

Stephanie Flanders, presenter of “Masters of Money”, claims that Keynes, Hayek, and Marx all had one thing in common: “they understood both the genius of capitalism, and its inherent instability.” But whereas Keynes and Hayek thought that you could distil capitalism or regulate it in order to separate the “genius” elements from the general instability, Marxism – using the method of dialectical materialism – shows how the factors that give rise to capitalism’s initial progressiveness – i.e. competition and the reinvestment of profits into new technology and means of production in order to generate even greater profits – are the very same factors that lead to capitalism’s inherent instability.

The key to Marx’s analysis of capitalism is precisely in the way that this method of dialectical materialism is applied to the field of political economy. Capitalism’s anarchic nature – resulting from the individual, private ownership over the means of production and the competition for profit that this entails – means that changes in the economy must occur in a dialectical way, thorough crises, rather than in the smooth, gradual way that the proponents of market forces and “supply and demand” imagine.

The imbalances seen under capitalism – i.e. between production and consumption; between the ever expanding forces of production and the limits of the market for the commodities resulting from these productive forces – are an inherent part of this anarchic system, and are seen at all scales within capitalism, such as the disproportionality between the different departments of the economy and even within a single sector (hence bottlenecks in production). But the only way to rid the system of these imbalances is precisely to eliminate the anarchy of the capitalist system itself – i.e. to have a democratic and socialised plan of production under the conscious will of society, rather than leaving production up to the blind forces of the market – as Marx explains in Capital:

“Since the aim of capital is not to minister to certain wants, but to produce profit, and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production, not vice versa, a rift must continually ensue between the limited dimensions of consumption under capitalism and a production which forever tends to exceed this immanent barrier. Furthermore, capital consists of commodities, and therefore over-production of capital implies over-production of commodities. Hence the peculiar phenomenon of economists who deny over-production of commodities, admitting over-production of capital. To say that there is no general over-production, but rather a disproportion within the various branches of production, is no more than to say that under capitalist production the proportionality of the individual branches of production springs as a continual process from disproportionality, because the cohesion of the aggregate production imposes itself as a blind law upon the agents of production, and not as a law which, being understood and hence controlled by their common mind, brings the productive process under their joint control.” (Capital, Volume III, chapter 15; Marx)

The limitations of the classical economists and of the modern day proponents of the free market – i.e. the monetarists – lie precisely in their undialectical treatment of the economy. For these economic theorists, the economy is a simple, mechanical system. Their explanations are either built on the “Robinson Crusoe” model of the economy, in which there exists a single individual on a desert island who is both the only producer and the only consumer, or are similar to those of a simple barter economy, consisting of the exchange of commodities between individual producers. In either case, by abstracting the economy to this level of the individual or of simple exchange between individual producers, the bourgeois economists remove all mention of the division of society into classes and the resultant struggle that arises from this for the surplus produced in society.

Rather than seeing the mathematical models of the economy as the generalised abstractions and approximations of an infinitely complex reality that they really are, modern bourgeois economists think that the equations are the reality and that the economy must conform to their models. Rather than making the theories fit the facts, the facts are forced to fit the theories. A similar idealistic tendency is often seen within modern physics, whereby the theories are judged by the beauty and simplicity of the equations, rather than by how well they fit the facts and explain the actual real life phenomena that exist.

In contrast to this idealistic approach, Marxist economics – based on a dialectical and materialist outlook – seeks to reach generalised conclusions by looking at the multitude of events and collective historical experience under capitalism (and of the economic systems of previous class societies), in order to draw out the laws and tendencies present within the complex system that is the economy. As Engels points out in his polemic against Duhring:

“...the principles are not the starting-point of the investigation, but its final result; they are not applied to nature and human history, but abstracted from them, it is not nature and the realm of man which conform to these principles, but the principles are only valid in so far as they are in conformity with nature and history. That is the only materialist conception of the matter, and Herr Dühring's contrary conception is idealistic, makes things stand completely on their heads, and fashions the real world out of ideas, out of schemata, schemes or categories existing somewhere before the world, from eternity — just like a Hegel.” (Anti-Duhring, chapter 3; Engels)

There is, however, also the opposite tendency within bourgeois ideology that seeks to deny the existence of any laws within capitalism. For these people, history and the economy are random processes, beyond the realm of scientific investigation. Such a concept is equally as idealistic as the mechanical view of the classical economists, but now arrived at from the opposite direction.

Economics and Science

Stephanie Flanders in the “Masters of Money” series highlights this tendency amongst Keynes and Hayek to see the economy as something inherently unpredictable. Both of these gentlemen sought to turn political economy into a serious science; but yet, according to Flanders, both men saw capitalism as a completely unpredictable system, due to its complex and chaotic nature. Such a view, which is both undialectical and idealistic, is incompatible with a genuine scientific – and Marxist – view, which sees order arising from chaos; predictability arising out of the unpredictable, as we have explained elsewhere.

Economics, of course, is not an exact science in the same sense as mechanics, due to the complexity of the system involved and the impossibility of isolating this system from the rest of the world. One cannot create repeatable laboratory experiments in the world of economics (although that has not stopped economists such as Milton Friedman of the “Chicago school” of monetarism – an extreme advocate of free markets and laissez faire capitalism – from trying to create social experiments for their economic theories, such as in Chile under General Pinochet); nevertheless, by observing the variety of events and process that occur, and by comparing these events against each other in terms of their outcomes, variables, and constants, one can identify the contradictions within the processes and formulate laws that describe – and predict – the basic behaviour of the system at a certain scale.

In this respect, economics is similar to medicine, meteorology, or geology. A doctor cannot always tell you exactly what disease you have or at what point death will occur; nor can weather forecasters or seismologists tell you exactly what the weather will be like next month or when the next earthquake will hit. Nevertheless, doctors, meteorologists, and seismologists can all make predictions –and often very accurate ones – at a certain scale, and the accuracy of these predictions is continually increasing as scientific understanding improves on the basis of experience and investigation.

An analogy can be drawn with that of thermodynamics. The behaviour of an individual, isolated gas molecule can be described using Newtonian mechanics; however, the behaviour of this individual particle becomes unpredictable as soon as we now examine a container of many hundreds or thousands of gas molecules, all interacting with one another. Nevertheless, out of this incredibly complex system, one can still draw simple, generalised laws that describe the behaviour of the volume of gas as a whole, including properties such as the temperature and pressure of the gas. From complexity arises simplicity; out of chaos arises order.

Similarly, whilst one cannot predict the exact outcome of an individual’s life, at the scale of society as a whole, generalised laws can be drawn and predictions can be made, such as the economic laws of capitalist crisis and the historical laws of the development of the means of production, class struggle, and revolution.

Ultimately, however, these generalised laws and economic theories, which are abstracted from this historical experience and investigation, must be applied to the concrete conditions facing us in order to gain a proper understanding of any given situation; these conditions include a whole host of political factors. It should never be forgotten that the economy is not a simple mechanical system that can be represented by abstractions and equations; it is a battle of living, breathing forces, and ultimately it is the balance of class forces that determine the given outcome of any economic situation.

It is to the credit of Keynes and Hayek that they, like Marx, sought to treat economics as a science, looking for the laws that governed the economy by a careful study of the facts. However, unlike Marx, neither Keynes nor Hayek were thorough materialists, nor were they dialecticians. As a result, their theoretical explanations frequently fall into the traps outlined above: either of idealism, only looking at one side of a many-sided, complex problem, and thus failing to provide a material explanation for phenomena; or of mechanical materialism, seeking to explain the economy as a simple clockwork system where cause and effect are linear and act in only one direction.

The General Theory

Keynes equally despised the idealistic and dogmatic nature of his contemporary bourgeois economists, who, faced with the crisis of the Great Depression and the clear failure of the free market, refused to abandon their assumptions, including those of Say’s Law, and their faith in the invisible hand. In his criticism of the classical economists, Keynes said that:

“[W]riters in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity...

“...The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics.” (“The General Theory”, chapter 2; Keynes)

In response to his peers in the political and economic community who sought for “supply side” solutions to the problems of mass unemployment and recession – i.e. to eliminate barriers to the free market, such as trade unions, which in the view of these economists restrict the ability for the market to find the “natural equilibrium” for wages – Keynes bent the stick in the opposite direction and simply focused on the question of demand, or “effective demand” as he referred to it – i.e. the ability for the producers of commodities to find a willing buyer who is able to pay (as opposed to demand in the sense of the “needs” or “wants” in society).

As we have explained elsewhere, Keynes saw the crisis of the Great Depression as a vicious circle in which high unemployment resulted in a reduced effective demand for commodities, which in turn led business to scale back or shut down, and thus increase unemployment further. In such a situation, Keynes believed government stimulus was necessary to provide a boost to effective demand and thus turn the vicious circle into a virtuous one, with increasing demand from the government leading to an expansion of production and employment, and thus greater wages and greater demand for consumer goods, etc. etc.

For Keynes, any stimulus would be sufficient, as he wryly comments in the General Theory:

“Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better...

“...If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.” (“The General Theory”, chapter 10; Keynes)

The New Deal in 1930s USA is often cited as the success story of Keynesian policies, but as the “Masters of Money” episode on Keynes highlighted, it was only the militarisation of the economy during WWII that ended the Great Depression, a process that ended in millions of deaths, the destruction of vast amounts of society’s produce capacity, and left a public debt of over 200% of GDP in countries like Britain – hardly a success!

Under-consumption and Overproduction

In essence, the Keynesian explanation of crisis is a theory of “under-consumption” – i.e. of a lack of consumer demand for the commodities that are produced. As we have explained elsewhere, Marxism, by contrast, sees capitalist crisis as a crisis of “over-production” – i.e. that capitalism is inherently unable to find a market for all the commodities that are produced. This arises from the fact that capitalism is production for profit, and this profit is simply the unpaid labour of the working class. In other words, the working class is always paid back less in wages than the value it creates in the labour process; thus their ability to buy back the commodities they produce is always less than the total value of these commodities. Commodities are produced but cannot be sold; profit cannot be realised; production ceases, and the system enters into crisis.

The Keynesian idea of creating demand through government stimulus is ultimately idealistic and undialectical. The simple question must be asked: where does the government get the money from for this stimulus? If the money is to come from taxes, then this will either mean: taxing the capitalist class, which means biting into their profits, creating a strike of capital and thus reducing investment; or taxing the working class, which will reduce their consuming power and thus reduce demand – the opposite of what government stimulus is intended to do!

In modern times, the government has increasingly resorted to borrowing money from the financial markets, through the selling of government bonds. But with the bailing out of the banks and the collapse of tax revenues, countries have been left with large public debts and deficits, and the global financial markets, rather than funding further government borrowing, are insisting that governments cut back public spending.

For the Keynesians, and the reformist leaders of the labour movement that are inspired by Keynesian ideas, the answer is simple: we must tax the rich and increase wages! But under capitalism, as we have explained above, production is for profit, and the working class can never receive in wages the full value of the commodities they produce, as Marx explained in Capital in response to the under-consumptionist theories of his day:

“It is sheer tautology to say that crises are caused by the scarcity of effective consumption, or of effective consumers. The capitalist system does not know any other modes of consumption than effective ones, except that of sub forma pauperis or of the swindler. That commodities are unsaleable means only that no effective purchasers have been found for them, i.e. consumers (since commodities are bought in the final analysis for productive or individual consumption). 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, chapter 20; Marx)

The Keynesian explanation for crisis is, in reality, not really an explanation for the cause of capitalist crisis at all. At best, it is an explanation for the continuation or deepening of a crisis in economy that already exists, or a suggestion for how governments can try to escape a crisis within the confines of capitalism. If a lack of effective demand – i.e. under-consumption – is to be blamed for the crisis, then one must surely ask: what leads to this under-consumption in the first place? As Engels points out in his polemic against Duhring:

“[T]he 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...

“...The under-consumption of the masses is a necessary condition of all forms of society based on exploitation, consequently also of the capitalist form; but it is the capitalist form of production which first gives rise to crises. The under-consumption of the masses is therefore also a prerequisite condition of crises, and plays in them a role which has long been recognised. But it tells us just as little why crises exist today as why they did not exist before.” (Anti-Duhring, Part III, chapter 3; Engels)

In other words, since the working class can never buy back all of the commodities that they produce, why is capitalism not always in crisis?

Historically, this contradiction of overproduction has been overcome through the role of investment, whereby the capitalists continually spend and reinvest a large proportion of their profits on new means of production – on research and new machinery, in order to improve productivity, drive down costs, gain a greater market share, and increase profits even further. As explained earlier, it is this investment, arising from competition and the pursuit of profits, that allowed capitalism to play a historically progressive role in developing the means of production. But as was also explained earlier, this re-investment of profits, rather than resolving the contradiction of overproduction and restoring economic equilibrium, only creates even greater productive forces – producing greater quantities of commodities and values, which must still be sold on an ever-restricted market –thus exacerbating the contradictions and preparing the way for a larger crisis in the future.

Unproductive investment – such as the earlier example given by Keynes of burying old bottles filled with banknotes – has also been used in the past in order to provide demand and create jobs. For example, there were a number of so-called Marxists during the post-war boom who believed that military spending by governments could be used to permanently avert a crisis. But as has been pointed out, governments cannot simply “create” demand; in reality they must take raise their money by taking a slice of wealth from either the capitalist class or from the working class. This unproductive investment is spending without producing any real value and serves as fictitious capital, which ultimately generates inflation – i.e. increases the circulation of money in the economy without generating an equivalent value that is also in circulation. This is exactly what was seen at the end of the post-war boom, whereby Keynesian policies lead to the crisis of the 1970s, in which economic stagnation was seen alongside rising inflation – a previously unseen phenomena known as “stagflation”.

All of this again shows the undialectical and mechanical nature of Keynesianism and other reformist solutions to crises, which do not follow through the implications of their suggestions to their logical conclusion. If investment is used to avert a crisis, this means investing in something material – i.e. in means of production, which must then produce further commodities, thus adding to the crisis of overproduction. If wages are to be increased in order to increase demand, this means biting into the profits of the capitalists; but this, in turn, reduces investment, which under capitalism is only conducted in order to make a profit. If demand is to be “created” through government stimulus, this, in reality, means either taking money from the capitalists and biting into profits, or taking money from the working class and biting into consumer demand.

In contrast to bourgeois economics, Marxism seeks to examine the economy dialectically – that is to say, Marxism seeks to explore the full implications of any action; to see the interconnectivity and feedback between different process and phenomena; to examine the system in its motion and in all its complexity. Marxist economics is about seeing the contradictions within the processes at play, and to show how these contradictions can always be resolved, but only by creating new contradictions in the process. This is the case with capitalism: a crisis can always be averted temporarily, but this only serves to heighten the contradictions and pave the way for a greater crisis in the future.

In addition, unlike the bourgeois economists, Marxists do not separate their economic analysis from their general analysis of society. The economy is made up of living, breathing human beings; as Lenin stated, “politics is concentrated economics”. The ruling class can always restore stability in the economy, but only at the expense of creating political instability and class struggle in society.

In the final analysis, the crisis of capitalism is not simply the result of this or that process; this or that contradiction. Crises are the result of the many interacting processes and contradictions within capitalism itself. As Marx says in Capital:

“Capitalist production seeks continually to overcome these immanent barriers, but overcomes them only by means which again place these barriers in its way and on a more formidable scale.

“The real barrier of capitalist production is capital itself. It is that capital and its self-expansion appear as the starting and the closing point, the motive and the purpose of production; that production is only production for capital and not vice versa, the means of production are not mere means for a constant expansion of the living process of the society of producers. The limits within which the preservation and self-expansion of the value of capital resting on the expropriation and pauperisation of the great mass of producers can alone move — these limits come continually into conflict with the methods of production employed by capital for its purposes, which drive towards unlimited extension of production, towards production as an end in itself, towards unconditional development of the social productivity of labour. The means — unconditional development of the productive forces of society — comes continually into conflict with the limited purpose, the self-expansion of the existing capital. The capitalist mode of production is, for this reason, a historical means of developing the material forces of production and creating an appropriate world-market and is, at the same time, a continual conflict between this its historical task and its own corresponding relations of social production.” (Capital, Volume III, chapter 15; Marx)

Keynes, Profit, and Investment

As the “Masters of Money” episode on Keynes pointed out, Keynes was able to recognise the interconnectivity of the capitalist system, whereby one capitalist’s wage costs are another capitalist’s market, and therefore what may be rational and necessary for one capitalist – to cut wage costs – is not necessarily rational for the capitalists as a whole. Vitally, however, Keynes did not see the interconnected relationship between wages and profits – that these were two sides of the same coin, both merely representing a divided proportion of the total value created by the working class through the application of labour – and that increasing one necessitated cutting the other, and vice-versa. Hence the inability of Keynesians to see that overcoming “under-consumption” – i.e. overcoming the lack of effective demand – through increasing wages or government stimulus can only create new contradictions by reducing profits for the capitalists and leading to a strike of capital – i.e. a reduction in investment.

Keynes defined the total demand in society, also known as the “aggregate demand” in macroeconomics, as being equal to the total income, which is also equal to the total output. This aggregate demand is composed primarily of two sources according to Keynes: consumption from households and investment by firms. This definition is similar to Marx’s two departments, defined in Capital Volume II, of production of capital goods (department one) and production of consumer goods (department two). Unlike Marx, however, Keynes did not then subdivide these two departments into their various components of value: constant, variable, and surplus.

Throughout Capital, Marx frequently highlights the need to examine the economy in its totality, rather than simply isolating specific aspects of the system or concentrating on the behaviour of single individuals and transactions. However, Marx also showed that it was the dialectical interaction between opposites within this totality – between labour and capital; between wages and profits; between department one and department two – along with the patterns that emerged from the anarchic and chaotic (and yet rational) actions of many different individual capitalists, that was key in understanding the dynamic and crisis-ridden nature of capitalism.

As mentioned earlier, the classical economists who preceded Marx were unable to understand the origin of profit, due to their treatment of the economy either as a “Robinson Crusoe”, desert island system, in which one man was both producer and consumer, or as a simple transaction between one buyer and one seller, whereby profits were simply created in the process of circulation by buying cheap and selling dear. In both cases, by reducing the economy to an individual or pair of individuals, the division of society into classes is lost.

By contrast, Keynesianism, on which modern macroeconomics is based, arrives at a similar result to the pre-Marxist classical economists, but from the opposite direction: by simply aggregating the economy into a single equation or schema of total demand, Keynesianism loses sight of the class struggle and the interconnectivity between wages and profits, and in fact often ends up ignoring the role of profit altogether. One can see the mechanical nature of the Keynesian schema by the example of the “Phillips machine” or “MONIAC”, a physical model of the economy based on Keynesian macroeconomic principles that uses water storage and flows to represent the stores and flow of capital and money, and which is supposed to be able to predict the behaviour of the real economy on this basis.

As a result of this aggregated, undialectical, mechanical view, Keynesianism and modern macroeconomics cannot explain the material basis behind investment under capitalism. At its best, bourgeois macroeconomics describes investment as being a function of the interest rate, with lower interest rates providing an incentive for investors to spend rather than save. But at the current time, interest rates are almost at zero percent, and yet there is no investment to be seen. At its worst, whilst consumption from households is materialistically explained as a function of disposable income, investment by businesses is idealistically explained as simply being due to “animal spirits”. These days a similarly idealistic explanation for investment is given in terms of the need for “business confidence”.

Resorting to “animal spirits” and “confidence” clearly explains nothing. One must ask: what then causes confidence? The argument given in response is typically of a circular nature: businesses invest if there is confidence; there is confidence if the economy is growing; there is economic growth if there is investment; and so on and so on. Whilst it is true that confidence, uncertainty, and risk play a role in determining the decisions of investors, this confidence and uncertainty must have a material basis. Under capitalism, investment is made in pursuit of profit; if commodities cannot be sold at a profit –or indeed sold at all, as is the case in the current crisis of overproduction – then production, and investment in new production, will not occur.

It is not a subjective lack of confidence that causes the crisis, but the objective crisis of capitalism that causes a lack of confidence. As has been seen on numerous occasions in the recent period, there have been frequent rallies of the stock market in response to the latest “plan” by politicians to “solve” the crisis; but these rallies are short lived, going up like a rocket and coming down like a stick, as the contradictions reappear and the next phase of the crisis emerges on the horizon.

The figures for the current crisis highlight the contradiction of overproduction in relation to investment: in 1990, business investment in the UK was approximately 14% of GDP per year, but has fallen to less than 8% today; but meanwhile, British companies are now sitting on more than £700bn in cash savings. At the same time, businesses that have survived the crisis are posting record profits, as the Economist (March 31st 2012) explains:

“The past four years have been bad for workers and savers but good for the corporate sector. Profit margins in American are higher than at any time in the past 65 years...

“...Margins have been boosted by firms’ tight control of labour costs and by a reduction in interest expenses cause by the policies of central banks throughout the rich world...

“...However, the current high level of profits is not leading to a surge in investment. As a proportion of GDP, American business investment is close to 30-year lows...

“...the high profit share of GDP is simply a corollary of the low share taken by labour...

“...American and European companies are choosing to spend their cash on mergers and share buy-backs rather than capital expenditure.”

In other words, rather than invest in new means of production, which must produce new commodities that must find a market and be sold, businesses are recognising that there is a chronic over-capacity in the system, and are instead choosing to spend their money in buying up existing companies – i.e. existing means of production. This process leads to concentration of capital, but without creating any new value. Instead of being used to develop the means of production and provide socially necessary goods and services, the hoard of wealth that has been amassed by the capitalist class is being squandered.

The Economist (July 21st 2012) continues to highlight the crisis of overproduction in causing the low level of investment:

“The big gap at the moment is between workers and corporations. Although unemployment remains stubbornly high and wage rises are hard to come by, corporate profits are taking a larger share of American GDP than before the financial crisis...

“...A high return on capital should encourage a wave of investment. The resulting expansion in capacity should increase competition and reduce returns. But that has yet to happen: companies are hording cash...

“...firms are reluctant to invest in the face of weak demand. Domestic consumers have been under pressure from austerity and higher commodity prices; the euro-zone crisis and a slowdown in developing economies is weighing on export prospects. Companies may have milked all they can from productivity improvement. The irony here is that high share of GDP for profits automatically results in a low share for wages and thus may eventually be self-limiting – a positively Marxist outcome.”

Hayek, credit and the crisis

Unlike Keynes, who saw the problem as one of effective demand during the crisis, Hayek saw the problem as one of loose monetary policy in the period before the crisis. In particular, Hayek argued that it was government interference in the money supply –e.g. through setting low interest rates, printing too much money, and encouraging the expansion of credit – that created bubbles and distorted the market, leading to crisis when the bubbles burst and the boom was seen to be largely based on fictitious capital.

Like Keynes, Hayek only sees one side of the problem – i.e. that of supply, as opposed to Keynes and the problem of demand. And also like Keynes, Hayek does not follow through his analysis to its logical conclusion and ask the obvious question: what would happen if governments had not intervened by setting low interest rates and encouraging the expansion of credit? First, however, one must ask the even more simple question of: what is credit?

Marx explains the role of credit under capitalism in Capital, explaining that credit serves a dual function. On the one hand, relatively short-term credit is required to overcome bottlenecks in production and maintain the flow and circulation of capital. For example, businesses need to borrow money to pay for wages and raw materials whilst they wait for previous produced good to reach the market and be sold. Alternatively, credit may be used to allow firms to expand production when they don’t have the upfront capital to pay for it.

On the other hand, credit also plays the role of artificially expanding the market – i.e. effective demand – and thus helping to delay a crisis. As explained earlier, under capitalism, the working class can never buy back the full value of the commodities it creates, due to the fundamental nature of capitalism as production for profit. As was also explained earlier, capitalism traditionally overcomes this contradiction of overproduction by reinvesting the surplus value created into new means of production in the search for greater profits. This, however, only serves to create even greater productive forces, and thus an even greater mass of commodities that must find a market, and thus –rather than resolving the contradiction – only exacerbates overproduction.

Credit – formed by the concentrated savings and deposits of individuals and firms in the banks – is used to artificially increase the consumptive capacity of the masses, and thus to temporarily overcome overproduction, allowing the productive forces to continue expanding. As we have explained elsewhere, the expansion of credit over the past twenty years – and particularly since the turn of the century – created the largest credit bubble in history and was the primary factor in delaying the onset of crisis.

This expansion of credit was required to overcome the growing proportion of wealth going to capital rather than labour, which became increasingly unequal with the attacks on the working class that followed the crisis of the 1970s and continued in the 1980s with the policies of policies of Reagan, Thatcher, and the other political representatives of capitalism. This ever increasing exploitation of the working class continued into the 1990s and the 21st century though the intensification of the working week and the increase in overtime, attacks on wages and conditions, and with many workers being forced to take two jobs in order to just get by. Alongside this increasing exploitation, credit was massively expanded through the use of mortgages, credit cards, student loans, etc.

Hayek’s ideas contain an element of truth in saying that the expansion of credit causes crisis. In reality, however, the expansion of credit does not cause the crisis; rather it delays the crisis by artificially expanding the market in the short term, at the expense of exacerbating the problem of overproduction, leading to an even bigger crisis in the future. Similarly, low interest rates were used to fuel the boom beyond its limits by encouraging investment and consumer spending – consumption that was, again, reliant on credit.

The expansion of credit, however, is a dialectical process: the expansion of credit allows the productive forces to grow; the growth of the productive forces fuels the expansion of credit. As Marx explains:

“Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of the markets. A mutual interaction takes place here. The development of the production process extends the credit, and credit leads to an extension of industrial and commercial operations.” (Capital, Volume III, chapter 30; Marx)

During the boom, nobody questions this seemingly virtuous circle. The bourgeoisie are filled with a sense of optimism. All is for the best in the best of all possible worlds. But as with all dialectical processes, at a certain point there must be a transformation from quantity into quality: the vast lending of credit on one side appears now as a tremendous pile of debts on the other; the restricted consumption of the masses is once again apparent, and the limits of the productive forces to expand reassert themselves; overproduction is evident and crisis breaks out. As Marx explains, this overproduction is, in the final analysis, the cause of the crisis:

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.” (Capital, Volume III, chapter 30; Marx)

Marx also long ago answered those who claim that it is the drying up of credit – familiarly known today as the “credit crunch” – that causes crisis, pointing out that it is, in fact, not the lack of credit that is responsible for the crisis, but that it is the crisis that leads to a lack of credit:

“As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself. As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available, but in a form in which it cannot perform its functions. A great deal of commodity capital, but unsaleable. A great deal of fixed capital, but largely idle due to stagnant reproduction. Credit is contracted 1) because this capital is idle, i.e., blocked in one of its phases of reproduction because it cannot complete its metamorphosis; 2) because confidence in the continuity of the reproduction process has been shaken; 3) because the demand for this commercial credit diminishes...

“...Hence, if there is a disturbance in this expansion or even in the normal flow of the reproduction process, credit also becomes scarce; it is more difficult to obtain commodities on credit. However, the demand for cash payment and the caution observed toward sales on credit are particularly characteristic of the phase of the industrial cycle following a crash...

“...Factories are closed, raw materials accumulate, finished products flood the market as commodities.” (Capital, Volume III, chapter 30; Marx)

It is, therefore, neither the expansion of the credit during the boom, nor the contraction of credit, that is responsible for crisis. The expansion of credit merely delays the crisis of overproduction; the contraction of credit is simply a qualitative manifestation of this very same overproduction.

To return to Hayek and the original question that the Hayekians do not consider: what would happen if governments were not to intervene in the economy and credit was not expanded? Would crises be avoided by the magical invisible hand of the market? The modern day Hayekians imagine that without government interference, the market forces of supply and demand, with their accompanying price signals, would have solved all problems; that a crisis may still have occurred, but it would have been a minor blip in comparison to the deep recession that we are now experiencing due to a vastly inflated credit bubble.

But as we have explained above, credit does not create a crisis, but merely delays it. In the absence of the expansion of credit over, the crisis of the 1970’s would simply have continued and developed onto a new plane. The expansion of credit was required to maintain the consumptive capacity of the working class in the face of attacks on the wages – i.e. the purchasing power – of these very same workers, all in the name of maintaining profits for the capitalists. Without the expansion of credit, the expansion of the productive forces would have been met with a limited market – i.e. a lack of effective demand – at a much earlier date. Companies would have ceased to expand production in the face of a falling demand for consumer goods; unemployment would have risen; the vicious cycle of recession would have set in.

Rather than finding a stable equilibrium, the solution of the Hayekians – to remove any interference in the market and to allow the money supply to regulate itself – would simply lead to an increasingly volatile and turbulent system; to an economy that spirals out of control; i.e. to a situation that resembles that of the current period.

Once again we see that the fault of the Hayekians, as with the Keynesians, is their focus on only one side of a many sided problem. In trying to resolve one contradiction, the capitalists merely create new contradictions elsewhere on a bigger scale.

In reality, despite his unbridled faith in the free market, Hayek was never really accepted by the political representatives of capitalism, who could not swallow his creed that there should be no government interference in the economy at all. In the face of crisis, bourgeois politicians have always buckled, throwing away all talk of the “free market”, and instead doing whatever it takes to save capitalism from its own contradictions. Hence the preference amongst the bourgeois politicians such as Thatcher and Reagan for Milton Friedman, a man who preached the virtues of the free market, but who was not afraid to advocate the strong arm of the state in guiding the invisible hand. Hence also we see the acceptance of Keynesian ideas in periods of crisis, such as now, by certain elements of the bourgeoisie, who, like Keynes, see the necessity for the state to intervene in the running and regulation of capitalism.

Keynesianism today

Modern macroeconomics, based on Keynes’ ideas in the General Theory, cite four main sources of output, demand, and growth for a national economy: consumption; investment; government spending; and exports. In “normal” times, a contraction of one section would hopefully be compensated for by another. But today all four of these sectors are held back.

Consumption is restrained by the enormous amounts of private debt, with even the so-called “rich” countries of northern Europe seeing huge household debts; for example, as a percentage of income the household debt in Denmark and the Netherlands is 268% and 249% respectively, whilst the UK has a figure 143%. A Wall Street Journal article entitled “Private debt will likely weigh on growth for years” (April 13-15, 2012) states that:

“Public debt has received most of the spotlight since the European debt crisis flared up more than two years ago. But private sector debt is arguably a more intractable problem...

“..The origin of the private debt problem is mortgages: real-estate prices soared in a number of European countries, and banks were willing to lend ever-larger sums for home purchases. The real-estate boom has since hit the rocks throughout much of Europe, but mortgage debt endures as an albatross handing around the necks of European consumers.

“Economists have found a strong link between consumption, credit booms and falling real-estate prices: countries that experienced a sharp rise in household debt will experience a sharper fall in consumption than nations where debt hasn’t risen as fast. If you borrowed a lot of money to buy your house (and the land it rests on), and then prices fall soon afterwards, you are more likely to want to repay the debt than go out to dinner, buy a new car or renovate your house.”

Meanwhile, the banks, which have equally large debts on their books, are attempting to “deleverage” – i.e. to reduce their debts. Hence the apparent mystery of why there has been so little inflation in recent times, despite the huge amounts of money that have been pumped into the global economy through quantitative easing and other similar policies; rather than going into the real economy and being spent, this money is simply being used by the banks to reduce their debts.

For similar reasons to households, governments in the advanced capitalist countries are restricted in their ability to increase spending, given their already vast public debts. Far from expanding government spending, the US economy – the largest in the world – is facing a “fiscal cliff”, with cuts to public spending and increases in taxes worth a total of approximately 5% of GDP due to kick in at the end of 2012.

Given the desperate times, equally desperate measures have been proposed. Forgetting all the lessons of history, a number of commentators have suggested that governments with independent monetary policy can just print money to pay off their debts, and quantitative easing is the first step on a slippery slope towards this. At best, such policies do nothing to solve the crisis; at worst, they can lead to hyper-inflation.

Investment, as we pointed out earlier, is at a historic low, with capitalists unwilling to invest in new production when there is already excess capacity – i.e. overproduction – across the board. Finally, therefore, we are left with exports. But it is a basic truism that not every country can be a net-exporter. For every export that must be an equivalent value of imports; or, as in the case inside the eurozone at the current time, there will be a flow of exports from one country and an accumulation of debt elsewhere.

Exports, imports, and trade imbalances

Each nation’s politicians promise to export their way out of the crisis. In an ideal world they would like to do this by making their country’s exports more competitive by holding wages down, whilst simultaneously hoping that every other country increases their imports by paying their workers more. But every country’s capitalists and political representatives are attempting to do the same thing. Hence we arrive at the general pattern of overproduction, but now seen on an international scale, with competition between the capitalists of different nations leading to wages being cut across the board, demand falling, and the market shrinking.

We see this today reflected in the calls by the Keynesian commentators of various countries, who exclaim that “we must be more like Germany and China!”; “we must invest, be more competitive, and export!” But not everyone can be like Germany and China. One only needs to ask the simple question of: export to whom? At a time when governments everywhere are carrying out austerity, where is there the demand for increased imports? Hence the calls by politicians and political commentators for Germany and China to “rebalance” their economies – i.e. to increase wages, thus reducing the competitiveness of exports and providing the means for greater consumption of imports. But why would the bourgeoisie in Germany and China want to do this when they are doing very well out of the current situation?

In reality, such attempts by countries to export their way out of a crisis only lead to a race to the bottom; to trade wars, increasing protectionism, and to an exacerbation of the crisis for all. Keynes, in fact, understood the dangers of large trade imbalances in a global economy, and was keen to see an agreement within the post-war Bretton Woods system that would limit imbalances between countries. In a world where every economy is linked to every other by a thousand threads, crisis in one country affects all. We therefore end up at the situation today where the crisis in the peripheral countries of the eurozone has led to a slowing down of the economies in Germany and China, who were reliant on exports to Europe for their growth. In turn, countries such as Australia, Brazil, and South Africa, who rely on exporting raw materials to China, have also seen a slowdown.

As we have pointed out elsewhere, China’s export-led growth is no longer a reality. Instead, the Chinese government have been forced to embark on one of the largest Keynesian experiments in history, pouring government spending into housing, infrastructure, and new means of production. But like all Keynesian experiments, this is only preparing the way for an even greater crisis of overproduction in the future.

At its root, trade imbalances – with deficits at one end and surpluses at the other – are not the cause of the crisis, but are yet another manifestation of it. The huge trade deficits of the peripheral countries in Europe – Greece, Spain, Portugal, etc. – are the other side of the coin to the trade surpluses in Germany. Wages have been held down in Germany and China, whilst the productive forces have expanded. The commodities produced cannot be sold at home, but have found a market abroad. The vast wealth of German and Chinese exports are, therefore, simply an expression of the equally vast overproduction that exists within these countries.

Marx understood and explained this in Capital:

“It should be noted in regard to imports and exports, that, one after another, all countries become involved in a crisis and that it then becomes evident that all of them, with few exceptions, have exported and imported too much, so that they all have an unfavourable balance of payments. The trouble, therefore, does not actually lie with the balance of payments...

“Now comes the turn of some other country. The balance of payments was momentarily in its favour; but now the time lapse normally existing between the balance of payments and balance of trade has been eliminated or at least reduced by the crisis: all payments are now suddenly supposed to be made at once. The same thing is now repeated here... What appears in one country as excessive imports, appears in the other as excessive exports, and vice versa. But over-imports and over-exports have taken place in all countries... that is over-production promoted by credit and the general inflation of prices that goes with it...

“The balance of payments is in times of general crisis unfavourable to every nation, at least to every commercially developed nation, but always to each country in succession, as in volley firing, i.e., as soon as each one’s turn comes for making payments; and once the crisis has broken out... It then becomes evident that all these nations have simultaneously over-exported (thus over-produced) and over-imported (thus over-traded), that prices were inflated in all of them, and credit stretched too far. And the same break-down takes place in all of them. The phenomenon of a gold drain then takes place successively in all of them and proves precisely by its general character: (1) that gold drain is just a phenomenon of a crisis, not its cause; (2) that the sequence in which it hits the various countries indicates only when their judgement-day has come, i.e., when the crisis started and its latent elements come to the fore there.” (Capital, Volume III, chapter 30; Marx – emphasis in the original)

The high public debts in the weaker economies of the eurozone, such as Greece and Portugal, are similarly a symptom of this same process. As we have explained elsewhere, the creation of the Euro was most of benefit to the German capitalists, who used the single currency as a means of economic domination over the rest of the Europe. German capitalism, which was (and still is) of greater competitiveness, due to a combination of low wages and high productivity, was able to use the Euro to increase the flow of exports to the weaker peripheral countries of the eurozone. But these countries had nothing to offer in return, and could only pay for these imports using credit –primarily supplied by German banks – which had become much cheaper thanks to the low interest rates that membership of the Euro provided. The result was rising profits in Germany and rising debts in Greece, Portugal, and elsewhere.

Public debt, therefore, is not a cause of the crisis, but yet another symptom of the crisis of overproduction. This is highlighted by the example of Spain, a country that before the crisis had public debts of only 36% of GDP and consistently ran a budget surplus, and which still has a public debt of only 69% today. But yet Spain is in a deep economic crisis. Its pre-crisis boom was based on a massive housing bubble, which in turn was fuelled by cheap credit, and now these bubbles have burst leaving the contradiction of empty houses alongside mass homelessness.

The bourgeois commentators often refer to the Euro crisis as simply a problem of competitiveness. But as we have explained above regarding imports, exports, and trade imbalances, international competitiveness is fundamentally no different from the competition between different capitalist firms: under capitalism there will always winners and losers. Not everyone can be the most competitive. Competition is always relative. The main difference is that in the competition between firms, weak firms will go under and will be subsumed by the stronger ones; on the international plane, less competitive national economies cannot be so simply assimilated – although that, in essence, is the proposal for a fiscal union inside the eurozone: for a single economic zone in which the weaker economies are placed under the direct control of the stronger ones – i.e. of German capitalism.

But as with the competition between capitalist firms, the competition between capitalist nations is ultimately a race to the bottom in which the capitalists are cutting away at the very branch they are sitting on: in trying to gain competitiveness they must either cut the wages of the working class, and thus cut into the market for the commodities that are produced; or they must invest in productivity and thus expand the productive forces. In either case, the crisis of overproduction is exacerbated. Again, what makes sense from the perspective of a single national capitalism – to cut wages, increase productivity, gain competitiveness, and export abroad – is ultimately destructive for the international economy as a whole.

This, once again, demonstrates the fundamental barriers to the growth of the productive forces: the private ownership of the means of production and the nation state, both of which have become the most monstrous of fetters on the development of science, technology, culture, and society in general.

“The growth fairy does not exist”

It is clear today that neither the Keynesians nor the monetarists have any answers. Unlike the optimism felt by the bourgeoisie in the years of boom, now there is nothing but pessimism amongst the ruling class. The monetarists and Keynesians are both wrong and they are both right; but both only see one side of the problem. It is clear that austerity is not working, but yet there is there is no money left for governments to stimulate the economy, and the financial markets are demanding cuts. The real answer is that there is no solution under capitalism.

The dichotomy of “austerity vs growth” is ultimately a false one. As The Economist highlighted (May 5th 2012), “Calling for growth is like advocating world peace: everybody agrees that it is a good thing, but nobody agrees how to do it.” To simplify: the pro-austerity camp believe that the private sector will step in to invest and create economic growth, but that debts and deficits must first be cut back and that structural “reforms” must be carried out to remove any “barriers” to labour market flexibility – e.g. trade unions, workers’ rights, health and safety regulations, etc. The Keynesians believe that it is government that must step in to stimulate the economy with investment in new infrastructure and housing.

The Keynesians are quite correct when they point out that austerity is not the answer, and that cuts are simply exacerbating the recessions across Europe. However, the Keynesians’ promises of “growth” instead of cuts are equally utopian. As we have pointed out previously, growth under capitalism cannot be created out of thin air. As The Economist eloquently put it (May 12th 2012), the “growth fairy does not exist”.

François Hollande, the newly elected President of France, has positioned himself as the leader of the “alternative to austerity”, in contrast to Merkel, who is seen as the callous representative of cuts. Opposition parties across Europe have lined up to support Hollande’s calls for a “growth pact”: Tsipras, the leader of SYRIZA in Greece, urges for a renegotiation of the memorandum; the United Left in Spain present similar demands for “investment” and “growth”; Ed Miliband and the other Labour leaders in Britain have applauded the election of Hollande and his opposition to “excessive” austerity.

But behind the platitudes and the pleasant sounding rhetoric, these very same leaders understand the true severity of the crisis and do, in fact, accept the need for austerity. For example, whilst presenting himself in opposition to cuts, Hollande has promised to reduce the French budget deficit to 3% by the end of 2013 and to eliminate the budget deficit altogether by 2017. Interestingly, these are the very same targets that the openly pro-austerity Tory party has committed to in Britain. Meanwhile, Miliband has admitted that the Labour Party cannot promise to reverse any of the Tory cuts if they win the next election in 2015.

These leaders are caught between a rock and a hard place; between the immense pressures of the financial markets and the masses of radicalised workers and youth. On the one hand they must offer some hope to the masses they are meant to represent, and who have turned to them looking for an alternative. But on the other hand, these same leaders make every attempt to reassure the markets that they are “responsible” statesmen. At heart, they understand that the cuts are not ideological and that under capitalism there is no alternative. The need for cuts is not questioned, simply the scale and the speed of these cuts.

The result is the so-called “Goldilocks” economic policy, as advocated by the IMF and others: a little bit of cutting in short-term (but not too much!), accompanied by government policies to stimulate growth, followed by longer term plans to reduce debts and deficits. As The Economist states:

“The myth of an expansionary fiscal contraction, the idea that deficit-cutting would boost growth, has been largely dispelled. The latest evidence is that in a downturn the multiplier effect of fiscal tightening can lead to deeper recession, making it even harder to cut the deficit. In the euro zone, moreover, countries cannot easily mitigate the impact through looser monetary policy or currency devaluation. Structural reforms may boost growth, but mostly in the medium term.

“Yet if high deficits were the answer, Greece and Spain should be booming. Many countries in the euro zone had no choice but austerity to try to calm bond markets that were pushing them into bankruptcy. Others cut for fear of suffering the same fate. Debt in advanced economies has reached levels exceeded only during the second world war, and the evidence is that high debt can stifle long-term growth. Sooner or later, most European countries have to start working off their debt. So the choice is not really between austerity and growth, but over the timing and speed of deficit-cutting and the right mix of structural reforms.

“The Goldilocks policy, as the IMF calls it, urges countries to embark on a gradual fiscal adjustment in the short term, if the markets allow it, coupled with a credible medium-term debt-reduction plan.”

Such a “plan” is completely utopian and merely emphasises the complete confusion and pessimism of the bourgeoisie who, in the absence of a proper analysis of the crisis and of capitalism, are forced to react empirically to events, stumbling from one disaster to another along the way.

The need for socialism

The trade union leaders are equally enamoured with talk of “jobs, investment, and growth”. Keynesian policies are put forward, but are cloaked and sugar-coated with the language of socialism. Len McCluskey, the General Secretary of Unite, Britain’s largest trade union, has called for “socialism of the 21st Century”, but is purposefully vague about what this means. These are hollow phrases with no real meaning, acting as an empty bottle, into which any content can be poured.

McCluskey is right to call for socialism. The labour movement in all countries is in need of a socialist programme. But this socialism must be clearly defined: the nationalisation of the banks and the other commanding heights of the economy as part of a democratic plan of production. In short: the abolition of capitalism and the transformation of society.

The potential that could be achieved by such a plan of production is evident by the tremendous amounts of idle factories, empty houses, and unemployed workers that sit unoccupied due to the crisis of overproduction and the limits of a system in which production is only for profit. If these human and material resources were put to use, there would be no talk of scarcity or poverty. Living standards could be improved dramatically; the working day could be reduced to mere hours; the material basis would be laid for everyone to fully participate in the democratic running of society.

The inspiring struggles in Greece, Spain, and Portugal show the willingness to fight for an alternative. But yet, in each case, the leaders of the movement are not up to the challenge. The situation is like that before a wild forest fire breaks out: the ground is dry and a simple spark could ignite a rapid wave of flames. The workers and youth of all countries are watching each other. All that is needed is for one example to point the way forward for the rest. The call must be: neither austerity nor Keynesianism, but the socialist transformation of society.

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