[OPE] Chris Harman on the spectre of Keynesianism

From: Jurriaan Bendien (adsl675281@telfort.nl)
Date: Sun May 18 2008 - 13:01:29 EDT


I do not know who has the leading edge in successful prediction for economic events these days. My guess is that many of them would work for hedge funds, since you do not earn such high salaries unless your prognoses translate into hard cash. http://www.alphamagazine.com/Article.aspx?ArticleID=1914971   Being a person who can successfully predict events takes a mix of abilities, technique and experience, but even so you can be very good at predicting some things, and lousy at others. Predictive ability becomes a commodity worth money, so it is hoarded, and you may not know anymore what other people know.

My argument is, that we are now dealing not with Keynesianism, but with the "results" of Keynesianism.

Keynesianism is not per se "scientific" (it has both a scientific and an ideological component) but it provided a scientific rationale for policies which sustained the bourgeois order for many years. 

The point is, (1) that you cannot explain e.g. the "global savings glut" (sometimes called "excess liquidity") in terms of Keynesian "hoarding", and (2) that financial markets nowadays work in quite a different way than they did in Keynes's own time. 

This is not generally understood by leftist economists, because most of them lack any understanding of financial economics and modern capital finance (except people like Michael Hudson, Jan Toporowski, Costas Lapavitsas, Willi Semmler, Sabri Oncu etc).

Very briefly, the commercial imperatives of capitalist production are three main ones:

1 - cutting your costs
2 - increasing your sales
3 - increasing your profits

It is usually difficult to reduce your fixed capital costs (except to rent rather than buy, in some cases - this will become more a common practice among capitalists in future, lowering GDP), but you can reduce your operating costs for example by relocating production to an area where costs are cheaper, or obtaining inputs from a cheaper source. If real wages are fairly stagnant, you can create extra final demand and sales by extending more credit. If you cannot increase your own profits from product sales, you can increase your profits by taking profits from other capitalists (if you like, a redivision or redistribution of surplus value). 

In this sense, my argument is, that "the longterm tendency of the rate of profit in industries to fall", in response to increasing labour productivity, is "a powerful longterm stimulus for financial globalisation", which precisely serves these three imperatives I mention. 

This is not generally understood by Marxists, but my argument is that the two are necessarily linked. As Marx himself says, foreign trade and the "increase in share capital" are a countervailing influence to the tendency of the rate of profit to fall. But this is ignored in 99% of the Marxist literature.

The drop in average levels of industrial profitability is directly associated with increases in organisational restructuring and speculative activity. It is directly associated with capital market inflation. So the transformations of capital finance are in good part a "direct result" of the falling rate of profits in industries. 

This is not adequately explained by Jan Toporowski in his book on capital finance, because he does not really look at the initial sources or causes of the inflow of extra capital into the capital markets. He looks more at what happens, "given" that you have that strong inflow.

As I said to David Laibman a month ago, I think that neoclassical economics (and probably all bourgeois economics) is ultimately based on an exceedingly simple idea, namely that what is not consumed is saved, what is saved is not consumed, and what is saved is invested etc., from which it seems to follow that if investment falls, this is attributable to reduced savings and excess consumption. 

A friend of mine described this fairly simply in his Phd in 1987 based on some ideas by Bukharin, Kalecki and Mandel we read. A similar idea is implied in John Weeks's 1989 book "A Critique of Neoclassical Macroeconomics" (a more mathematical treatment).

It is a kind of zero sum game, in which higher savings mean lower consumption, and lower savings mean more consumption, whereas higher consumption means lower savings, and lower consumption means higher savings; higher savings mean higher investment, and lower savings mean lower investment. Higher investment then also means lower consumption, and lower investment means higher consumption.

So then, economic growth in any economy is explained essentially in terms of savings, consumption and investment within a given environment, which has effects on employment, output and price levels. If there is not enough investment, you are consuming too much and saving too little. If there is too little consumption, there is too much saving and too much investment. And so on.

This story is exactly the same for the macro-economy, or for the individual micro-economic actor, and so it explains very exactly what the link really is between macro and micro in bourgeois theory. It is the foundational principle for the theory of supply and demand.

In any situation, the question a market actor faces, is: "should I save my money, spend it or invest?". He necessarily has to do one of those things, and whatever option he takes, has necessary consequence for the other options. This provides the model with a sense of "intellectual rigour" and a intrinsic market logic ("economic rationality").

Unfortunately this simple macroeconomic "metaphor", inspiring the basis of all bourgeois analysis, is fraught with problems, and I would say ten of the main problems are the following:

1) There is no zero-sum trade-off between investment and consumption (think e.g. of hoarding and credit, luxury consumption, unproductive expenditure and arms sales)

2) There is no really strong positive correlation between the level of savings and and the level of investment

3) No good distinction is made between productive and unproductive investment, between ordinary and luxury consumption, and between intermediate and final consumption

4) No good distinction is made between different social classes of consumers, savers and investors, who are in a very different position as regards propentisty to save, consume and invest.

5) It is assumed that asset values remain fairly constant "One of the achievements of growth theory was to relate equilibrium growth to asset pricing under tranquil conditions. The hard part of disequilibrium growth is that we do not have - and it may be impossible to have - a really good theory of asset valuation under turbulent conditions. (1987 is an excellent year in which to make that observation!)" 

6) The role of capital finance in influencing demand and investment is poorly theorised (for example, it is fantasized that GDP = "the whole economy").

7) The unit of analysis is the national economy, ignoring that international trade in money, goods/services and capital assets strongly influences the national economy.

8) It is ignored that the amount of marketable assets existing external to production is at least as large, or larger than production assets.

9) There exists no necessary relationship such that if employment increases, wage rates will rise proportionally etc.

10) In general, the relationships between the key variables are not "mechanistic" in the sense of simple linear causation or a zero-sum game.

So really, the simple (rather vulgar) idea underlying neoclassical economics - that people can either spend, save or invest in any economy, and therefore, that there are necessary relationships between them impacting on output, employment and price levels - is rather mistaken, if it is turned into a model of what drives the macroeconomy. Marx's simple Capital Vol. 2 model is already enormously superior to this.

Some of this is admitted by Neo-Keynesians like Lester Thurow, but they still typically attribute phenomena which defy the theory of market logic simply to "extra-economic" factors - there is no real attempt made to create an integrated theory of the capitalist economy, which means that some implications from their theories still flatly contradict other implications of those same theories. 

They try to theorise something which cannot be consistently theorised in that way, because it leaves out essential aspects. For example, I can make any number of theories about the nature of an egg, but if I leave out the yoke (perhaps because I looked at the egg only from the outside), then I can theorise as much as I like, but the theories will not be any good, because an egg without a yoke is only part of an egg, not a whole egg. So long as I leave out the yoke, all my inferences will be faulty.

A heterodox or Marxian economist would then say, what we need is a much better, more realistic model of a capitalist economy, and of the causal relationships involved - better, both because it makes more sense of the empiria, and better because the causal relationships involved are theorised in a more realistic way. 

We need a model in which the economy does not just consist of investors and consumers, but also includes producers, dealers (market-intermediaries), benefit-recipients, and rentiers.  Once we do this, we are vastly better able to predict what will happen, because we are immediately freed from dumb kinds of economics. 

In my own theory, for example, the largest masses of capital in the modern capitalist economy are oriented by the search for "economic rents" or "surplus-profits", and production is merely "one instance" of capital assets - thus production is only one source of capital accumulation, and not the only one.

But as I said, this is definitely not a Marxist theory. Marxist economics is about "extracting surplus from production", "how capitalism reproduces itself", and "why things are not fair".

I think Marx's own theory of capital is vastly superior to that (Soros, Attali etc. also admit that), and therefore I generally avoid Marxism. By the time that the worst enemies of a theory acknowledge its merit against those who claim to support it, the theory has been twisted into its opposite by all concerned.


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