Sunday, 28 July 2013
Is there a lack of demand?
Many economists and even so called Marxists put the crisis down to a lack of demand in this post I will outline why I don’t feel this is the case. Mainstream economists and politicians in the main capitalist economies are in a dilemma. They could not come up with a convincing explanation of why there was a financial collapse and the ensuing Great Recession. When former Chairman of the US Federal Reserve, Alan Greenspan, was asked in the US Congress, right in the middle of the slump, if he could explain what had happened, he responded, “I am in a state of shocked disbelief.” He was questioned: “In other words, you found that your view of the world, your ideology was not right, it was not working (House Oversight Committee Chair, Henry Waxman). “Absolutely, precisely, you know that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well”. The conventional wisdom was unable to explain the huge disruption in modern capitalism. Now mainstream economics is in a dilemma. They are not sure what to do to fix it. Is not the lack of effective demand really a description of a slump rather than its cause? Many Keynsia economists including Paul Krugman who some seem to hold a lot of faith in even so called marxists puts the cause of this crisi we are living through down to a lack of effective demand. In his well-known (among economists) attack upon the failure of neoclassical economics to explain economic recessions and particularly the Great Recession (How did economists get it so wrong? 6 September 2009, NYT Magazine), Krugman presents his ‘co-op babysitting’ example. He says “a recession is a problem of inadequate demand. There isn’t enough babysitting demand to provide jobs for everyone who wants one.” But this is not an explanation, but a description. Inadequate demand arises in the baby coop because people hold onto the money rather than buy babysitting services. This is really yet another refutation of Say’s law. All it shows is the possibility of a breakdown between buying and selling because of money. Marx had described that possibility over 150 years ago. It’s not new. But in Krugman’s example, there is no explanation of why or when the coop starts hoarding money rather than spending it; it just starts happening. Krugman puts it down to ‘irrational’ people and ‘imperfect’ markets (the latter, a neoclassical explanation). As Michael Roberts points out in his article http://thenextrecession.wordpress.com/2012/04/27/effective-demand-liquidity-traps-and-debt-deflation/ “Some Marxists reckon crises and slumps are not caused by a lack of effective demand or excessive debt or financial instability, but by falling and low profitability in production. The impact of falling profitability can be postponed by credit (fictitious capital) expansion, but then the eventual slump will be exacerbated by the need to clear this excessive debt. This is my view. Other Marxists reckon the crisis is due to ‘the anarchy of capitalist production’ (that’s too vague and too high a level of abstraction as an explanation for me). Or some say it is due to ‘underconsumption’, or a lack of spending power by workers. That’s pretty much the Keynesian view (just a description of a slump not an explanation).” The Keynesians think that the crisis in capitalist production is simply one of insufficient spending or ‘effective demand’. So the government must step in to fill the gap if the private sector cannot deliver. But is the lack of spending not caused by a lack of income? As Mauldin hints: “The problem is not merely one of insufficient spending: the key problem is insufficient income. By definition, income has to come before spending. You can take money from one source and give it to another, but that is not organic growth.” What Mauldin does not specify is that ‘organic growth’ (i.e. growth not based on fictitious capital) under the capitalist mode of production depends not on income as such but on the share that goes to profit. If that is insufficient,then organic growth based on productive investment will not materialise, whether the government spends more or less. Its clear to me as told by Marx that profits follow investment and profit cannot be made out of thin air so speculating on stock exchanges is one idea that I’m not convinced on as you need to create surplus value in order to realise profit in affect this is what Marx called fictitious capital in other words crating no real value. As Marxists we understand that only the products of human labour contain surplus value, because surplus value can only be extracted from workers’ labour-power (as in manufacturing). When this surplus value is realised (i.e. commodities are sold), it becomes profit in the hands of the capitalist class. Financial speculation, on the other hand, does not create new surplus value. Instead, it exchanges shares, stocks and financial instruments which are essentially claims on existing or future surplus value being produced. But these claims on surplus value become commodities in their own right in the hands of the speculators. As a result, their monetary value, their price, fluctuates in line with supply and demand. In fact, their price can get completely out of sync with the value they actually represent. So getting back to my main question is a lack of demand the cause of the financial crisis we can revert to the experts they being Karl Marx and Frederich Engel’s. “The word overproduction in itself leads to error. So long as a large part of the needs of society are not satisfied, or only the most immediate needs are satisfied there can of course be no talk of an overproduction of products, in the sense that the amount of products is excessive in relation to the need for them… The limits to production are set by the profit of the capitalist and in no way by the needs of the producers (i.e. workers).” (Marx, Theories of Surplus Value, p. 527) Marx clearly explains that production under capitalism is determined by the profitability for the capitalists and not demands of the masses. “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 (i.e. crisis of overproduction) is a phenomenon only of the last fifty years;” (Engel’s, Anti-Duhring, pp. 395-396). Engel’s outlines that the under-consumption of the masses is not a new phenomenon. Indeed, in all class societies the exploited never receives the full portion of their product: the surplus goes to the ruling class. If under consumption was a cause of crisis, capitalism would permanently be in crisis! The market shrinks (i.e. demand falls) as a result of the crisis of overproduction. It still doesn’t explain why crisis occur when they do. Comrades, it is time to erase the bourgeois-Keynesian schema that dictates crisis is caused by lack of demand. This is a classic crisis of capitalism as brilliantly explained by Marx in his three volumes of Capital. The underlying cause of the crisis is the falling rate of profit. With thanks to Steve Dobbs of West London Socialist party branch http://socialismiscrucial.wordpress.com/2013/07/22/overproduction-is-not-due-to-underconsumption-marxist-theory-of-crisis-pt5/ And Michael Roberts and his excellent blog.