Marxism, Political Economy, Philosophy

The Prophet, Re-Armed, Part 2

This is the second installment of a continuing series that responds to Joseph Heath’s posts at his Substack, “In Due Course,” which explain what he sees as the sorry state, even the decline, of academic Marxism—what I’m inclined to see as a continuing presence if not a resurgence. Part 1 addressed the labor theory of value. Here I defend Marxist theories of economic crisis (a.k.a. the business cycle). Again, I quote Heath, then offer a rejoinder.

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“2. The crisis theory. Throughout most of the 19th century it was not so unreasonable to expect the capitalist system to collapse of its own accord, because it was extremely unstable. Between 1870 and 1914, for example, the U.S. economy went through 11 recessions, along with 7 full-scale banking panics. Unfortunately, like most 19th century economists, Marx did not have a very good understanding of what was causing these boom and bust cycles. He made a number of provocative claims about the ‘crisis tendencies’ of capitalism, but there is little agreement among his interpreters about what his precise theory was. His most concrete suggestion seemed to be that capital accumulation would increase the mechanization of production, which would flood the market with commodities at the same time that it depressed wages, leading to increasingly severe problems of underconsumption/overproduction. [This last sentence is a crude restatement of the law of accumulation, which, not incidentally, already yields a rudimentary theory of crisis (a.k.a. the business cycle)]

“This entire way of thinking was overturned by John Maynard Keynes, who showed that the shortfall in demand observable during a recession was not caused by overproduction, but rather by a shortage of money. (There is a famous Paul Krugman column that explains this point in very simple terms.) The implication was that the business cycle, which Marx had taken to reveal a deep ‘contradiction’ within the capitalist system, was actually more of an adjustment problem in the monetary system, which could be addressed through a combination of bank regulation, control of interest rates, and state spending. This was not just a theoretical breakthrough, it led to a series of policy changes that actually succeeded in moderating the business cycle, drastically reducing the instability of the capitalist system.

“Marx, by contrast, had no way of explaining even some of the most basic features of recessions, like the fact that they are often preceded by crises in the banking system. His way of thinking about these problems has been completely superseded by 20th century developments in economic theory. (Consider, for example, this video, which purports to offer a Marxist explanation of the 2008 financial crisis. If you pay careful attention, you will notice that at the crucial junctures it fails to offer any actual explanation for anything.)”

My rejoinder. This is simply mystifying. I say that as someone who has used Marx’s two-sector model—from Vol. 2 of Capital and Part 2 of Theories of Surplus Value—to explain the Great Depression of the 1930s, then the financial crash and the Great Recession of the 21st century. I’m also someone who recognizes the so-called Harrod-Domar model, a Keynesian design, as a derivative or a distant echo of the same two-sector schema, as per the judgements of many economists who are themselves neither Marxists nor Keynesians. Not to mention Michal Kalecki’s Marxist theorizing of the 1930s, which is widely understood among economists as an adjunct of the Keynesian Revolution.

Notice the last sentence in Heath’s first paragraph. It’s a crude restatement of the law of accumulation I explained in my last post, which predicts the decline of living labor (variable capital) vis a vis past labor (constant capital), and thus yields a rudimentary theory of crises determined by the distribution of income between capital and labor—precisely as Kalecki showed in his essays of the 1930s on business cycles. Marx himself insisted that this distribution of income was a function of class struggle, or the balance of social power (which of course includes cultural-intellectual authority).

Again, I narrate the re-discovery and adaptation of Marx’s two-sector model in Pragmatism and Political Economy, Chapter 1, from Keynes and Kalecki to W. H. Hoffmann, Roy Harrod, Evsey Domar, WassilyLeontief, Michio Morishima, and Kenneth Kurihara, on toward the controversies caused by Joan Robinson’s challenge to marginalist “production functions” and Piero Sraffa’s studies in the theory of value, The Production of Commodities by Means of Commodities (1960).

Heath refers us to Paul Krugman’s apocryphal essay as if it proves once and for all that “shortages of money” rather than overproduction explain recessions. That is almost laughable testimony to the hegemony of Milton Friedman’s Monetary History of the United States (1966) in mainstream economists’ approach to business cycles. But it’s not an approach uncontested by Marxists like me, who get the better of the argument, by far. Among others, I demonstrated in Origins of the Federal Reserve System (1986) that in the early 20th century, monetary theories of crisis were superseded or subsumed by those, Marxists and marginalists alike, who argued that surplus capital (overproduction) was the proximate cause of the crises that plagued the late-19th century (and the driving force of modern imperialism).

That argument still outdoes its rivals. For example, the best extant explanation of the Great Depression and the Great Recession as comparable phenomena is derived from Marx. It happens to be mine, but all I’ve done is apply what I understand to be his theory of crisis. Its most accessible form is “Their Great Depression and Ours,’ Challenge 52:3 (May-June 2009): 34-51. The longer version is Against Thrift: Why Consumer Culture os Good for the Economy, the Environment, and Your Soul (2011), pp. 3-74.