Unemployment and Revolution

We haven’t said much on Strange Times about what is now looking to be the most serious capitalist economic crisis since the Great Depression (and quite possibly far worse than that one).   That’s because we’re floundering. Well I am anyway, and I have no desire to hide that by just coming out with “Marxist” platitudes about the inevitability of it, “we told you so”, “look what capitalist greed leads to” etc.  And I also don’t have enough of a grip on it to write anything which goes beyond superficial handwaving  about the falling rate of profit, over-production, debt, and all the rest of it.

When I see our leaders pontificating about the crisis and proposing various ‘stimulus packages’ it appears queasily Monty Pythonesque.  I don’t think they really know what they’re doing. It would be funny if it wasn’t so serious.  Nevertheless I just don’t know enough about Marxist or capitalist  economics to produce any sort of informed critique.

So that’s my excuse for staying quiet.

Nevertheless, it’s clearly of the utmost importance for us to get our heads around it rather than to just sit on the sidelines and watch things fall apart.   So to make a start on this I’d like to launch a discussion of an old (1981) paper entitled  Unemployment and Revolution.   It’s an analysis of why unemployment occurs under capitalism and why moving to social ownership makes far more sense than waiting for capitalism to rise phoenix-like from the ashes, yet again.

This paper  was written (partly) with reference to the particular conditions in Australia at the time – unemployment had reached its highest level since WW2 and there had been much debate in the media about the need for everyone to “tighten their belts” etc.  However it’s clearly relevant as a starting point to debate about the far more serious crisis which is unfolding at the moment.

I re-read it a month or so ago and found it very useful, although there were parts of it which confused me due I think to both a certain lack of clarity in the way some parts of the paper was written, and to my own low level of conceptual understanding when it comes to economics.

Anyway, I invite people to read it and respond with comments.   In particular I’d like to see questions!  I have some myself, a number of them possibly quite naive, which I’ll try to formulate after re-reading it yet again.

307 Responses to “Unemployment and Revolution”

  1. 1 Arthur

    Just widening the topic slightly the U&R paper had little to say about financial crisis because there wasn’t one at the time.

    Most of the commentary on the current financial crisis suggests that it will (and has already) spread to the “real economy”. I think that has it backwards. There have been underlying structural problems in the “real” economy since the late 1970s, but crisis has been (remarkably successfully) postponed by a massive overextension of credit. As far as I can make out current plans for dealing with that are “more of the same” – ie even more massive overextension of credit to avoid immediate bankruptcy. Assuming it works, and the financial institutions that are actually insolvent can be kept afloat by government, the subsequent result would presumably be that governments eventually become insolvent too (so far, only Iceland) or run out of room to maneuver without an actual full scale crash.

    I think the U&R paper is still relevant because it focuses on the “real” economy as a cause of unemployment and crisis through recurrent “overproduction” (though without adequately clarifying that). If that is correct, the only way to resolve a crisis is to actually have it – ie there has to be massive destruction of capital values so that a new round of accumulation can begin. The financial side of that is wiping out fictitious assets such as the debts owed by creditors who cannot pay, and the share valuations that are simply absurd compared with the real assets  of the companies concerned (let alone their current prospects).

    But there is no clear boundary. “Property” is simply a claim to an income stream, so values assigned to such things as land and intellectual property are just the prospective income streams capitalized at the prevailing rate of profit.

    The same actually ends up being true of all the assets of a corporation. The actual cost of reproducing the physical assets owned by corporations is presumably dramatically lower than the valuations reflected in their books (which also include capitalization of prospective revenue from monopolistic rent seeking). In a full scale crash the overvalued assets get written down or actually scrapped in favour of more productive newer technology (including “fire sales” when firms go bankrupt and their assets dumped on deflating markets are bought by others that are more cashed up) . This is recurrent (used to be far more regular), because there is actually no other mechanism available for restructuring. The (partially self-fulfilling) assumption of a given rate of profit guides all investment decisions and there is no way to “discover” that the actual rate is much lower until the crisis breaks out.

    Sorry, this is all just abstract – I haven’t done, and am not planning to do, any attempted at the (necessary) detailed statistical analysis.

  2. 2 paullyj

    Capitalism’s first real attempt at globalisation has failed due to the national character of capital.Whether or not national interests can move towards global control of investment will be of great interest over the next couple of years. Creditor nations will determine the outcome. Countries like the US and the UK will have to accept a big slide in their fortunes to get help from countries that have cash. I feel that they will accept austerity peacefully.Whether the crisis will be big enough to interest the working class I would not like to predict.Maybe the national  bourgeois   can sort it out , there is certainly a lot of people on the case unlike the 1930 where the   national  bourgeois let everything slide . As far as I understand it vast amounts of capital ( trillions ) are being held by federal reserves and  by banks ( even encumbered banks in the USA ) ready to be invested the moment they think they can get a return or at least not lose money.Just a few ideas here so lets knock it around

  3. 3 Jad

    Interesting link and good to see a post of real relevance to the working class on this site – after all, if the rest of the left in Australia are “pseudos” then you guys have a lot to live up to.The again, for the sake of a united left  it could be an appropriate juncture to ditch the temporary alliance with neoliberals and neocons and realign with the “pseudos” – Who knows,  with the way things are going the revolution may not be that far way.  

  4. 4 Arthur

    Jad there currently isn’t a “left” in Australia – hasn’t been for decades now.

    My guess is most of the pseudos will line up with the far right for protectionism just as they line up with the far right in opposing democratic revolution in the middle east and in demanding drastic reductions in living standards for the masses. So there may still be points of agreement with neoliberals and neocons opposed to protectionism, and perhaps also less extreme or more cautious in their insistence on reduced living standards (or at least “regretting” a claimed “necessity” instead of openly attacking workers for even wanting a more affluent life).

    paullyj, I don’t understand your post.

    Most banks appear to be insolvent (less so in Australia at the moment) – ie they expect not to be able to meet payments due to creditors because they expect not to be able to collect payments owed by debtors.

    A reasonable expectation is that most of their bank capital will be effectively wiped out in nationalization (with a view to re-privatizing them by later selling them to whoever has cash when “its all sorted out”).

    Assuming they do sort out the financial crisis (eg by massive inflation or other liquidation of bad debts) its hard to see either debtor or creditor nations escaping a long period of “austerity”.

    Whether the working class puts up with that peacefully remains to be seen. Certainly the Chinese bourgeoisie is expecting trouble from theirs, despite being a creditor nation – massive intensification of “public security” in expectation of mass rioting after only the first 20 million or so additional unemployed “creditor nationals”.

    How are creditor nations like China supposed to help pull debtor nations like the US out of crisis. By lending them money? Been there, done that.

    No doubt most people will continue to hope their rulers will sort things out – no option really given the absence of any left with a program of its own to do so.

    But if the ruling class cannot deliver, workers won’t have much choice about having to figure things out for themselves, so there will be room for a left again.

    A major reason there hasn’t been a left is that the ruling class was delivering – hence the endless complaints from pseudos objecting to capitalism on the grounds that it was too progressive for their tastes.

  5. 5 patrickm

    Paullyj; I think you’re upside down on this issue, but it’s refreshing to see a comment start a discussion in such an open an honest manner. 

    ‘As far as [I] understand it vast amounts of capital’ have just been wiped off the face of the earth as a series of bubbles burst, as they have done many times in the past, but usually as single events. (anyone like some tulips)  The game of who owns what, that is now played around most of the globe, but definitely in all the developed parts, is equivalent to musical chairs.  The fact that it is able to be played around the world is why the term globalisation arose.  The term didn’t exist at the end of WW2 (the last time world growth was negative) but the game was still being played.  The fact that many ruling classes via their elites (Putin, Mugabe etc, the ‘national character of capital’ that you refer to) won’t obey any independent referee and still carry on, chair or no chair, in many parts of the world is what one would expect from this primitive globalisation. 

    ‘All political power grows out of the barrel of a gun.’  The question now under serious discussion (after the bubble burst) is who owns what?!  Who is sitting in a chair and who is holding zip in NET terms?  Control of net zip is very bad news if you want to have a right / authority to control anything.  Who used to own what that they don’t own now?  Who is the loser?

    Creditor nations can be burned if the politics turn to burn.You say ‘Countries like the US and the UK will have to accept a big slide in their fortunes to get help from countries that have cash’ or what?  You ‘feel that they will accept austerity peacefully’ but I wonder why you think this.

    I think ‘the crisis will be big enough to interest the working class’, but we won’t find out for another year or so in Australia, and I don’t think the ‘national  bourgeois let everything slide in the 1930’s‘ but rather tried frantically to do the best they could to preserve their capital and the political entities that capital enabled them to control.  But try as they might, it ended in the disaster of WW2 after push came to shove when the cake was shrinking. 

    WWs have not been good for the ruling classes that started them, so I don’t think that plans are afoot for another. Nothing is ‘ready to be invested the moment they think they can get a return or at least not lose money’.  Every day a bucket of money from ‘workers’ wages 9% including self employed (actually just a tax on employers is another way of thinking about it) is delivered to a bunch of bureaucrats that run super funds and they have to place these funds to the ‘advantage of the workers’ who nominally delivered the money.

    Anyway just some return thoughts for now.


  6. 6 Steve Owens

    There’s an old saying goes something like: Capitalism can survive any crisis as long as they can convince working people to pay for it.

    In any Capitalist crisis we “need” the Labor party in power so that the workers can be fed the medicine by “their” party.

    I think what happens in this economic crisis with resemble what happened in other economic crisies. In the Asian economic meltdown living standards were reduced and foreign companies bought up companies at bargain prices.

    Look at the Korean auto industry.When Japan hit an economic brick wall the government introduced a stimulus package, built lots of roads to nowhere. They refused to let their banks fall over and as a result had a stagnant economy for 10 years plus. A result was that Japanese companies either fled overseas or were taken over, again by foreign companies ala Mazda.

    The pattern of rich foreigners taking over has already raised it’s head, look at all the noise about Chinese companies taking a stake in Rio or Fortescue. Pacific Brands has seen the writing on the wall.

    The main danger is what I like to call the Sarkozy nonsense where the French president wants French auto companies to close factories in eastern Europe, rather than those that stand on French soil.

    I must say that my latent Republican sentiments rise to the surface as Obama tries to save GM, whereas McCain says let them fold.

    I don’t think that there’s much governments can do to stop the crisis but there’s plenty they can do to make it worse. The Great Depression was the Great Depression because they answered a banking crisis with protectionism. There is the argument that the New Deal made it worse, I just don’t know but it certainly didn’t make things much better.

    Hopefully it will be a short savage rearrangement of who owns what then Capitalism can go back to development of worldwide productive forces.

    PS if you want to quote me I think the Crisis has been brought about by the tendency of the rate of profit to fall, yes surely it must be that. (please note sarcastic use of terminology)

  7. 7 Arthur

    For those interested in what Marx had to say, unfortunately he did not develop a clear exposition of a theory of crisis (connected with an account of competition, credit etc). However there are some posthumously published notes in Theories of Surplus Value which shed a lot of light if studied carefully (they are not easy to follow and require study of the rest of his work on Capital).

    The material on Crisis from section 6 in chapter XVII of Part 2 is particularly relevant. In particular it sheds light on the basic concept of an overproduction of capital in terms of accumulated value that cannot produce surplus value under the given conditions. This is a “real” crisis, not just a financial crisis.

    The key point is that capitalist production is not just barter or even commodity production, let alone production in general or social production, but very specifically production for the accumulation of surplus value realised as profit.The function of a crisis within the capitalist mode of production is to restore the necessary conditions and proportions required for profitability when production and consumption, demand and supply etc have moved too far apart.

    The only way to eliminate crises is to eliminate production for profit and substitute production carried out on behalf of the associated producers for meeting their own needs rather than expanding the wealth of parasaites.

  8. 8 dalec

    Hey you don’t suppose that the present crisis of capitalism has any-thing at all to do with imperial conquest and war do you?

    There is nothing new under the sun folks.

    Rome collapsed due to imperial overreach, likewise the British empire.

    Oh no we must not talk about the war. Surely the adventures in Iraq and now Afghanistan have nothing at all with the decline of the US empire ? As a consequence of these adventures, the US people have seen declining wages, a collapse of vital infrastructure such as roads and bridges, an increased disparity between rich and poor and an increasingly disfunctional society. As well as a massiv increase in debt.

    Surely this has nothing to do with the global economic crisis that started in the US remember.

    Perhaps you should all take these things seriously, stop blathering about the glorious victory of the thousand year reich in Iraq and get down to some serious analysis instead of the faux Marxism so beloved of this site.


  9. 9 Arthur

    Wow Dalek, that was really insightful. There is nothing new under the sun. Hence no possibility of progress and we can all just keep on ranting about how awful everything is.

    In case anyone hasn’t noticed the the entire world system is heading into crisis, not just the US empire (which went into decline long before Iraq). While victory for the fascists in Iraq might have accelerated economic crisis as Dalek presumably hoped it would, it’s hard to see how their crushing defeat has done so.

  10. 10 dalec

    Precisely Arthur,The Imperial conquest program in Iraq has bankrupted the country, diverted resources from the maintenance of internal infrastructure, impoverished the people and set the stage for the rise of China.

    No, and I will have to spell it out here, the direct cost of the war is not the problem; it is the consequent diversion of resources from infrastructure and general development and the loss of the internal multiplier effect that has crippled the US economy. So much so that people have borrowed on the “value” of their homes to maintain their living standards in the face of the decline of real wages. 

    The Neocons and Bush really believed that they could restore the US fortunes with a program of imperial connquest; by maintaining garrisons all over the world and by outsourcing manufacture to the developing countries. Even to the extent that they now purchase components for the military from China! Declining or not, conquest is the imperative for all imperial powers as they sink into the footnotes of history.


  11. 11 patrickm

    I suppose that Unemployment and Revolution was produced by Arthur at the time because the issue of unemployment had become ‘warm’ for political activists. 

    I remember that people in Australia in the late 1970s were starting to think about such issues as levels of unemployment, the length of time workers were spending unemployed was growing (and had been seemingly relentlessly for perhaps a decade).  So there was beginning to be a ‘market’ for an analysis of the issue.

    On memory, official levels were approaching 10% then. As of today they are 5.2% but rapidly rising; in the U.S. 8.9%. 

    A year ago in Australia, unemployment was at 20 yr low of 3.9%. 

    Undoubtedly a new market is developing for U & R and any updates etc that follow.  The tiny Lastsuperpower crew are thus well ahead of the game if we intend to ‘play’ (that is systematically contribute over the issue) as we somewhat unsystematically did over the issue of Iraq.  I think we should.

    The article provides a good grounding for much communist thinking and when one comes across a young person who might ‘think the ideas of Technocracy Inc have some appeal as an alternative production system’ should be applied immediately as first aid. (If worn do not remove tin foil cone hat while waiting for the straight jacket)

    Older people influenced by such proto-fascist thinking should be immediately left alone to babble in an unobtrusive corner. While they wont die quietly, they will die.

    After U & R was first published, capitalism economically rebounded world wide and particularly strongly in Australia while the discredited bourgeois politics of the Vietnam era continued to fade from the public conscience.

    Basically you have to be around sixty, or a bit of a historian to have much of a clue about just how rotten the capitalist system really is from a red perspective.  There just haven’t been the opportunities for the masses to gain the sort of education from practice that was forced on young people, particularly reds who were serious about stopping the US war against democracy in Vietnam.

    The economic recovery over the last thirty years, and these consequent political and cultural changes to what was thought of as Left were somewhat mildly surprising to me at first, until I was able to rationalize them with larger political events centered around China and the collapse of Soviet revisionism.  

    But like others at ST I could not help feeling ‘alien’ (over the last decade) till I could be seen watching the news and mumbling and shaking my head in wonder as what I recognized as a bubble economy, grew to breathtaking dimensions. Basic Marxist learning was simply absent from other people’s thinking (especially ‘Marxists’) and I became a ‘grumpy old man’.

    However the various ‘leaders’ I now see on the news look more like aliens every day.  They obviously have limited connection to planet earth, and are palpably gripped with fear as they hurl money at ‘poor’ people and demand multiplying effects and stimulating experiences.  (Did anyone see Ben Bernanke the other day?  He looked shell shocked!). 

    I can’t blame Obama for flicking the switch to Vaudeville, but that wont work. When ‘it’ burst a couple of years ago in the U.S. with the start of the Sub-Prime real estate collapse I don’t suppose any Marxist was surprised, and I thought “here we go, ‘the U.S. has hit the wall’ ‘, something I had always thought inevitable.  That’s part of the reason why I had always liked the name lastsuperpower. The era of the two superpowers that started with the end of WW2 had to come to an end, and IMV was not going to be replaced with another form of imperialism. 

    Imperialism itself was going to go the way of the dinosaurs, and the EU, China or any other country, would never be able to reverse the verdict of history and tread down that old and discredited path that had seen the mighty U.S.A. humbled in Vietnam, and the U.S.S.R. mortally drained while floundering in Afghanistan.

    Mao had written in the 1950s that ‘imperialism will not last long’ and when reflecting upon this thought a couple of years after 9/11 over the issue of liberating Iraq, I took fifty years as being a reasonable period of decline, and concluded that ‘The U.S. isn’t capable of such an imperial task as was imagined by those that were taken in on the right, and by the anti [Iraq] war movement. In general old style imperialism is no longer possible and we have entered a new era where the U.S. is the last superpower.  (2006-03-26)

    We have that global bust now (ready or not) and a world-wide market for this analysis (provided in U&R) is now growing before us daily, and almost everyone will agree with the thought expressed in U&R that ‘Capitalism can survive any crisis if we let it’ and the overwhelming majority of working people in western countries who have been enjoying rapidly rising living standards generated by that booming capitalism of the last decades, would express the hope that ‘…it will be a short savage rearrangement of who owns what [so that] then Capitalism can go back to development of world-wide productive forces.’ 

    But analysts, from the tradition of the revolutionary left don’t deal in hope, we can safely leave that to the current crop of ruling-elites (led by Obama) pretty nakedly scrambling to maintain their two-party dictatorships.  We are more interested in applying a few theories we have developed over the years and developing some new ones in the light of these new developments.

    With the head of the IMF insisting that people understand that this crisis will be very hard times for the masses affected in developed countries, but will kill large numbers of vulnerable people in less developed countries, we can better grasp the further thought expressed by Arthur; ‘Jad there currently isn’t a “left” in Australia – [and] hasn’t been for decades now.’ The head of the IMF is urging people to desperately deal with this reality rather than to succumb to the ‘charity begins at home’ thinking expressed in protectionist sentiments that Steve referred to, saying;   ‘The main danger is what I like to call the Sarkozy nonsense…’ 

    The ‘we’, that was perhaps assumed thirty years ago, when U&R was being researched, ceased to exist, and now the sentence ought to be read in that different light.  For example the pseudo-left and the greens, while existent and even dominant all those years ago, at least had physically existent left groupings in opposition to them, whereas now there is obviously nothing physically operating. 

    Whatever is to be found is only on the net. However with the net I don’t feel any less able to contribute to the fight for modernity and liberation.  As a matter of fact, the net has produced a new me, almost as isolated as ever physically, but self evidently able to contribute to all manner of debates and change views across the world!  As a matter of fact I am about to post on an historical issue that will only interest a few people (but it interests me) and that’s the thing about joining with others to blog at a collective site – it provides more than just quantity of feed it also produces different qualities as well.  Of course nobody is obliged to read anything, and if others want their own personal blog they can have it; as for me I prefer the association with and advice of others.

    The subjective intent of isolated communist theoreticians to contribute to the destruction of this system, during this period of objective unity with ruling-elites and ruling-classes where we have been happy to see capitalism spread to many parts of the world (where the very essence of their problems are a lack of capitalism) produces interesting and very strange times.

    Currently opposition to ‘rotten’ capitalism in the western world is overwhelmingly reactionary pseudo-left or green opposition, with even rapid development itself seen as rotten!  But vast levels of unemployment during a global economic meltdown, is bound to focus a lot of minds in the west that have for decades been distracted or utterly disinterested.  These minds are overwhelmingly working class and the short answer is that people who can’t afford to pay their bills can’t afford ‘moral’ green views (to paraphrase George Bernard Shaw in his Pygmalion).  This issue, unlike Iraq, will get up close and personal so we can expect people will get involved in far greater numbers than we have experienced since lastsuperpower was established and obviously that reinvigoration with fresh people is vital for anything, otherwise it will rapidly die out.

  12. 12 Bill Kerr

    Robert J. Brenner speaks with Jeong Seong-jin, “Overproduction not Financial Collapse is the Heart of the Crisis: the US, East Asia, and the World,” I think this is another excellent discussion document. There are similarities and differences with arthur’s analysis

    Similarity: the financial crisis masks an underlying overproduction crisis – also, which is a bonus, Brenner does explain how the overproduction crisis led into the financial crisis in more detail
    Difference: Brenner implicitly supports an underconsumption thesis I think whereas Arthur says that is a faulty analysis

    Brenner discusses a broad range of economic and political issues in an interesting way:

    “asset price Keynesianism”
    Obama (just a centrist Democrat)
    possibility of collapse of the dollar (“terrifying”)
    New Deal didn’t work or was very slow to work in the 1930s
    prospect of US remaining as the world’s policeman (the core capitalist elites want this to continue for now)
    the role of China in the current crisis (they are still pouring money into the USA and despite appearances they still do want to prop up the US economy but as the crisis deepens they may not be able to sustain this)

  13. 13 Steve Owens

    Bill I think that Marxists suffer from a fair share of magical thinking.Would The Tendancy for the rate of profit to fall have any less explanatory value if we just called it The law of diminishing returns?What about Capitalist crises being crises of overproduction, surely overproduction alone is not enough to throw the system into crisis as in the real world overproduction can be easily resolved by lowering production the very thing that happens in a crisis.

  14. 14 Arthur

    Just a quick note on first reading of Brenner.

    Leaving aside some important issues for critique later I do think it’s the closest I have seen yet to a scientific (hence Marxist) analysis of the details. So well worth thorough study and following up related references.

    Also agree with much of the substance of Patrick’s post ie the times are changing and its way past time to come out of isolation.

    “Marketing” in the sense that we need to be serious about at least running a web site that people have heard of and are interested in will become more possible now, but was always essential and the previous lack of comprehension about this has pissed me off totally.

    But I would also stress that we only have something to market by comparison with the flatness of the surrounding countryside on the “left” – eg I was pleasantly surprised to find so much to agree with in Brenner (but points of disagreement will also be very important).

    It’s decades since those of us around at the time nominally agreed that the times called for priority to theoretical work. We haven’t done it (because its hard to do when there’s no audience for whom it could influence actual strategy and tactics in political struggles).

    We can now see clearly enough that there will be interest so we have to get down to work on developing some much deeper ideas, than simply not going along with obvious gibberish from the pseudos.

  15. 15 Steve Owens

    Bill what makes you believe that this is an overproduction crisis rather than a Minsky crisis?

    I also cant see where you get the idea that Brenner is an underconsumptionist.

  16. 16 Bill Kerr

    hi steve,I’m not really ready to answer your questions but do see them as important and in these times something I should focus on in order to be able to articulate clear answers. I still have more questions than clear answers myself. Arthur’s paper requires several rereadings by me and Marx’s critique of Ricardo is too difficult at this stage of development of my knowledge. Also note that arthur was not particular confident about his explanation of overproduction in section 5 of U&R. We can perhaps agree at this point that we are both not experts and ought to study these questions more and contrast marxist explanations with other explanations (eg. the Austrian school) to work out which ones makes more sense. 

  17. 17 Arthur

    Steve’s question’s are (unusually) useful.

    The concept of a Minsky crisis is not explained in Brenner’s article but just mentioned. Essentially it is the view that underlies most of the material currently appearing about speculative bubbles causing a financial crisis which may result in a crisis in the real economy unless properly handled. A succinct summary can be found in the Wall Street Journal:

    “At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they’ve taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. “This is likely to lead to a collapse of asset values,” Mr. Minsky wrote.
    When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived.”

    This does accurately describe the surface phenomena which has reappeared time and again. But it begs the question as to why “investors” take on more and more risk when the economic cycle is in phase of prosperity and why things “eventually” change so that they are unable to pay off their debts. It implies that proper regulation of financial markets by monetary authorities should be able to prevent such speculative bubbles.

    At present there is near universal agreement that the markets were underegulated and regulatory oversight should be tightened to prevent such absurdities, just as there was near universal agreement that prosperity was enhanced by abandoning regulation and giving free reign.
    Absurdly the current swing in both mainstream opinion and the official rationalizations of government policy is simultaneous with measures openly intended to persuade banks to resume lending – ie far from controlling credit more tightly so that it won’t be used for speculation they are actually engaged in dramatically loosening controls to extend more credit, even to the point of near zero official interest rates and government guarantees to cover the debts of financial institutions that go bankrupt as a result of feeding speculation.

    This complete disconnect between actual policy and its rationalization is eerily reminiscent of the “Weapons of Mass Destruction” rationale for the Iraq war. Its only purpose is to keep the chattering classes chattering idly while policy makers make policy. The result of such complete incoherence is an overwhelming sense of cognitive dissonance that fed into quite absurd conspiracy theories on Iraq and is likely to do the same on the economic crisis.

    As Brenner points out there has been an underlying shift in the real economy which produces the surface phenomena:

    “The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000. Economic performance in the U.S., Western Europe, and Japan has steadily deteriorated, business cycle by business cycle, in terms of every standard macroeconomic indicator — GDP, investment, real wages, and so forth. Most telling, the business cycle that just ended, from 2001 through 2007, was — by far — the weakest of the postwar period, and this despite the greatest government-sponsored economic stimulus in U.S. peacetime history.”…”The main cause, though not the only cause, of the decline in the rate of profit has been a persistent tendency to overcapacity in global manufacturing industries.”…”The result was too much supply compared to demand in one industry after another, and this forced down prices and, in that way, profits.”

    That is a classical description of overproduction which results in a lack of outlets for productive investments that can actually produce the returns expected and consequently drives the overproduced capital into riskier and riskier speculations. Brenner continues:

    “Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private. At first, they turned to state budget deficits, and in this way they did avoid really deep recessions. But, as time went on, governments could get ever less growth from the same amount of borrowing. In effect, in order to stave off the sort of profound crises that historically have plagued the capitalist system, they had to accept a slide toward stagnation. During the early 1990s, governments in the U.S. and Europe, led by the Clinton administration, famously tried to break their addictions to debt by moving together toward balanced budgets. The idea was to let the free market govern the economy. But, because profitability had still not recovered, the reduction in deficits delivered a big shock to demand, and helped bring about the worst recessions and slowest growth of the postwar era between 1991 and 1995. To get the economy expanding again, U.S. authorities ended up adopting an approach that had been pioneered by Japan during the later 1980s. By keeping interest rates low, the Federal Reserve made it easy to borrow so as to encourage investment in financial assets. As asset prices soared, corporations and households experienced huge increases in their wealth, at least on paper. They were therefore able to borrow on a titanic scale, vastly increase their investment and consumption, and in that way, drive the economy. So, private deficits replaced public ones. What might be called “asset price Keynesianism” replaced traditional Keynesianism. We have therefore witnessed for the last dozen years or so the extraordinary spectacle of a world economy in which the continuation of capital accumulation has come literally to depend upon historic waves of speculation, carefully nurtured and rationalized by state policy makers — and regulators — first the historic stock market bubble of the later 1990s, then the housing and credit market bubbles from the early 2000s….”

    “After all, during the past seven years, thanks to the borrowing and spending encouraged by the Federal Reserve’s housing bubble and the Bush administration’s budget deficits, we witnessed what was, in effect, probably the greatest Keynesian economic stimulus in peacetime history. Yet we got the weakest business cycle in the postwar epoch.”

    That sounds reasonably plausible to me. Characteristically those decades of massively Keynesian expansion of government deficits in order to stave off  stagnation (ie postpone a crisis of overproduction) was accompanied by near universal agreement among the chattering classes that neo-liberal policies were engaged in contracting “big government”. As usual the most massive expansions in big government occurred under the Republican administrations that so strongly opposed it, while the Clinton Democrat supporters of “big government” attempted budget restraint but found the economy seizing up.

    I’ll leave it there, but would stress that it wasn’t some “regulatory mistake” by governments but an objective necessity to encourage expanded credit. The same thing happens in any overproduction crisis. Capitalists extend more credit to their buyers so that they can  keep selling despite the overproduction. They also receive more credit from their suppliers, who are doing the same thing. This overextended credit is itself a form of speculation and feeds more extreme forms and enables outright frauds. When the expected sales and profits eventually fail to materialize eg due to a fall in prices from overproduction (or a relative fall when accompanied by inflation) the debtors cannot pay their creditors who cannot pay theirs and it blows up in a financial crisis.

    I think the difference made by big government and its monetary policies is that it has enabled postponement of a full scale world market crisis for decades whereas they used to occur every decade or so in the late nineteenth century. The long term result of a longer period between crises is of course much greater disproportions and a much bigger crash. But as Keynes said, in the long run we are all dead anyway.

    I don’t agree with Bill that Brenner’s actual analysis implicitly supports an underconsumptionist view. In fact he explicitly says:

    “Because the problem is overcapacity, massively exacerbated by the buildup of debt, what is still required is, as in the classical vision, a shakeout from the system of high-cost, low-profit firms, the subsequent cheapening of means of production, and the reduction of the price of labor.”

    The underconsumptionist view is directly opposite – that an increase in the price of labor would stimulate demand and resolve crisis.That impression of implicitly supporting underconsumptionism may perhaps arise from the stuff towards the end about working class power influencing state policy in their collective interests, which I read as essentially empty rhetoric, rather than part of his economic analysis of the crisis.

    Re the idea of a crisis of overproduction being easily resolved by lowering production. That’s certainly what happens in a crisis, and is happening now. It means mass unemployment and is not something “easily resolved”.

  18. 18 Steve Owens

    Bill what immediately strikes me about Brenner is his claim that during the longest boom in Capitalism’s history, Capitalism was in fact doing poorly. He qualifies this by saying that US and Euro Capitalism were in reality doing poorly. The boom may have been accomplished by squeezing workers harder, by privatising state assets and by funding growth through a speculative real estate bubble. This may all be true but hey this is Capitalism that’s what it does IE lurches forward through booms and busts. For Capitalism booms and busts are like breathing, good air in and bad air out. Its a contradictory process but it is a unity (of opposites if you like)
    Capital being a relationship rather than a thing we workers can expect the worst of it. The question is what to do? (interesting though the whys are the whats are more important)
    The Minsky theory might only skim the surface but gee it fits the factsPS ah the Austrian school I bumped into a card carrying Austrian school member at work the other day luckily I had some garlic and a cross and he left me unharmed. 

  19. 19 Steve Owens

    For anyone unfamiliar with the Austrian school they are devotees of total deregulation. Their only proper role for government is in maintaining law and order. The police under their system would be huge as workers gathering together to strike would be in violation of the law as would be Capitalists who conspired to fix prices. We used to have these laws the were the Anti combination laws. Im not sure how many Capitalists were caught but many early trade unionists were transported to Australia. The Austrians basically deny class struggle and believe that any collectivist strategy will end in totalitarianism. (unlike their police state which is just there to defend the free market, all hale the free market)

  20. 20 Steve Owens

    As to overproduction being easily resolved, I still think that overproduction alone is unlikely to throw the system into crisis.

    Look at the US auto industry, is that a crisis of overproduction? The US auto industry can be divided into two. On one hand you have GM, Chrysler and to some extent Ford, making cars that the market just doesnt want any more. They did deals with the Auto Union that leaves them with substancial costs, unlike the other US auto industry, mainly Japanese firms, that manufacture in American plants that are non union. ( from memory I heard that Toyota makes as many cars in the US as GM the only difference is that Toyota sells theirs at a profit).

    I also think that in the auto industry theres little danger of overproduction of commodities as for decades they have run on a “just in time” model and with a sofisticated sales approach, they would have a pretty good idea of sales projections and produce accordingly.

    You could argue that overproduction has occurred in Capital goods, but I havent seen any evidence of overproduction of consumer goods in the auto industry.

    Still my point remains – if overproduction of goods is the problem, then producing less goods is the answer. My point is that rather than overproduction being the snag Bear Sterns running a leverage ratio of 30:1 now thats a problem.

    When a company produces too many cars it can reduce those numbers immediately, lay people off, cancel the night shift, close the plant for a month, it’s not nice but it’s not hard. However when a bank has 30 times more debt than equity(and lots of the debt turns bad), well what can you do? just wind up the operation give all the executives golden separation packages and move on. I love Citibank’s approach.. they got a government bail out and immediately bought up toxic debts as they still think they may turn the greatest profit.

    But you gotta love Capitalism, remember the Latin American debt crisis.. you could buy huge debts very cheaply in the hope that one day these debts would be repayed. You got to love a system that can bankrupt itself and then make a market out of trading the debt.

    Anyway my point is that real crises need more than overproduction, they need some real Bernie Madoff creativity.

  21. 21 Arthur

    Posting this again after 7 hours, since it appeared to be accepted ok but did not show up.

    Overproduction and overcapacity are not some esoteric “Marxist” concepts. It’s their inevitability under capitalism that is widely misunderstood – it’s so irrational that people just can’t believe it until they actually see it happening.

    These concepts are straightforward descriptions of what people actually see in front of their eyes at certain phases of the business cycle (like now).

    Steve has picked the auto industry to illustrate his view that overproduction is easily resolved.

    A pause to simply google “overcapacity automobile” would show its been recognized as a looming problem for many years and likewise for global overcapacity in other industries. (Incidentally so bad in Japan that it drives massive overcapacity in Japanese financed plants in China).

    So much for the theory that it’s just as US problem and that Chinese capitalism will save the day.

    Here’s an overview of why the inevitable response of cutting back production does not mean it is “easily resolved”. It isn’t just the car industry “There’s too much stuff on the market“.

  22. 22 Steve Owens

    One of the USA Vice Presidents of Nissan said on Dec 5 that his main fear was that he might not be able to access auto components due to small manufactures going under, again if you thought that over production was the problem then there would be plenty of auto components for Nissan.

  23. 23 patrickm

    Let us suppose that Nissan set up the most productive manufacturing plant in the USA, and let us suppose that they adopted as a matter of course (as almost every modern management does) “Just in time” as the cutting edge of technique.  So, we have, of necessity, a problem built in with this technique.  We have a situation where for the want of a washer produced through outsourcing, there is an inability to complete the product.  It is out of the manager’s control.  What works smoothly before is collapsing under him now and that is all he is expressing. It is not that there aren’t factories around that are capable of producing the washer, indeed they have dropped from 24 hour per day washer production to 16, to 8 hours, to limited hours per week, and now they can’t function at all because their whole financial structure doesn’t permit it.  Production has ground to a halt in one entity reliant on another – welcome to the modern world. Meanwhile there are not many customers for new cars anyway. The budgets for fleet purchases are not there, they are all cancelled, all the government purchases based on 3 year turnover are now based upon 4,5,6 etc year turnover, and if they aren’t already, they will be soon.  That implies massive overproduction capacity.

  24. 24 Bill Kerr

    hi steve,The overproduction terminology is shorthand for a cluster of concepts. Arthur explained this in his answer to your question Steve by quotes from Brenner.

    As well as overproduction of commodities which can’t be sold, the cluster of concepts includes falling rate of profit and a shift to capital intensive production. This last concept is important. When the boom is on, worker’s wages often increase, and this is an incentive (essential move actually owing to the competition) for the capitalist to replace workers with more sophisticated technology. In this scenario it’s inevitable that eventually rate of profit will fall and this leads to enormous amounts of capital being tied up in industries that are becoming less profitable (ie. overaccumulation of capital as well as production).

    If the capitalist can move previously accumulated capital to other viable startup industries then the crisis can be avoided for a while, but eventually this will no longer be possible. (only a thumbnail sketch which requires more discussion but the on the ground reality for many years is that we do have booms and busts so whatever explanation has to explain the boom-bust cycle)

    Another term that is sometimes equated with overproduction is overaccumulation. I’m thinking that might be a better term to use since it also hints at the shift to more capital intensive production (vital part of understanding the process) and also hints at the core concept of accumulation of capital being the core driver.

    Being clear about the terms and what they mean is important and perhaps overaccumulation carries more meaning. It has the advantage of not being “immediately obvious” and therefore perhaps encouraging more investigation rather than just assuming the “obvious” meaning.

    I agree with you that if the only problem is producing too many commodities in the absence of other problems, then that would not be so much of a problem. Just shift to making something else that people do want and have the money to pay for.

    I’ve also seen it argued that overproduction is just the flip side of underconsumption. The capitalist produces commodities that can’t be sold (overproduction); workers don’t have the money to buy the commodities (underconsumption). ie. the same situation described from different viewpoints.

    Using the term overaccumulation instead of overproduction might help to solve that problem as well.See this article: over-accumulation, over-production, under-consumption for a discussion of this latter point. (linking to it for discussion not necessarily endorsment)

  25. 25 Arthur

    Unfortunately my post with lots of links on overcapacity only got past the spam filters after Bill’s last post.

    As should be clear from that, I do not agree with Bill that the term “overproduction” should be treated as a “cluster of concepts” that “includes falling rate of profit and a shift to capital intensive production”. That is just confusing.

    By overproduction I really do mean “there’s too much stuff on the market”. WHY that inevitably happens periodically is a deep and complex question. There is a connection with the long run tendency of the rate of profit to fall, but the connection is far from simple and they are certainly not part of the same cluster of concepts (even though Marx refers to crises in a Chapter of Capital concerning contradictions in the law of the tendency of the rate of profit to fall).

    There is of course a sudden sharp fall in the rate of profits at the outbreak of crisis (including negative profits and actual bankruptcy). I did not read Brenner’s reference to this as implying that the long term tendency of the rate of profit to fall due to rising organic composition of capital was supposed to be a direct explanation of cyclic crises, or part of the same “cluster of concepts” as overproduction.

    There may be some value in using the term over accumulation if it makes people think more carefully instead of just assuming “overproduction = underconsumption”. But I doubt it. I’ve only had a first look at the material linked to by Bill and haven’t followed the links from there yet. But at first glance it looks like a very, very confused “cluster of concepts” indeed! There is obviously a discussion going on out there to which I will have to pay close attention and participate in. But my prejudice is that very little scientific thinking from those engaged can be expected at present, though it is bound to widen and deepen as more people take a serious interest.

    I won’t be able to develop this here. But here’s a quick hint on my understanding of the indirect connection between the two concepts. I think it runs in the opposite direction from that implied by Bill, and perhaps suggested by the term “over accumulation”. If capital is invested with a higher organic composition of capital in the right proportions, the rate of profit would slowly and tendentially fall, but both profits and consumption would continue growing without crisis. So no direct connection. No crisis caused BY increasing organic composition. But there is no mechanism (other than crisis) to ensure these “correct” proportions. Instead there is a tendency for accumulation to proceed on the assumption of a rate of profit and composition of capital that has ceased to be the right proportions for avoiding crisis (sometimes assuming that the average organic composition and rate of profit has not changed as much as it has). Additional capacity is installed using similar techniques with the same old organic composition to meet an effective demand that has already been met. That overcapacity and overproduction means the capital value accumulated in this way does not return the expected profit and so does not actually function as a capital of that value (or forces out some other capital).

    Recovery from crisis involves investment in capacity using substantially more capital intensive techniques and devaluing (writing off or destroying) the capital value of the old plant. This is a destruction of existing capital values side by side with an increasing organic composition, and hence lower rate of profit.

    Sorry, I don’t understand this stuff enough to explain it more clearly, but had to say something to avoid views being attributed to me that I don’t hold. In general we should avoid explaining each other’s views and just present our own and challenge each other’s as best we understand them.

  26. 26 Steve Owens

    Bill I see overproduction pretty simply. The producers make 100% of what consumers demand. Thats equilibrium. When producers produce 100% plus X then thats overproduction. When consumers suddenly demand less than 100% then we are no longer talking about a crisis of overproduction but one of demand collapse. I guess that you could argue that overproduction causes demand collapse but that gets pretty chicken and egg sort of territory.I was being too simplistic about the US auto industry I wasnt aware that they were drownding in product. I used to estimate production levels by looking at the lot next to the Mitsubushi car factory near where I live but they closed that factory several years ago and I lost my barometer.

  27. 27 Arthur

    Using terms such as “consumers” is a source of confusion (and especially underconsumptionist confusion). This is generally understood to refer to households consuming “consumer goods”.

    Overproduction is more supply than demand, more for sale than being purchased. The overwhelming bulk of demand is from capitalist producers buying their supply of inputs from other capitalist producers. Only a relatively small proportion is from “final” consumption by households.

    BTW I’ve now read many (not all) of the links and not changed my prejudice 😉 I found it interesting that Brenner is on the editorial board of Against The Current (ATC), journal of “Solidarity”.

    My impression is that they are revolutionary left, with various wrong lines etc rather than outright pseudos. Their page on crisis has lots of links at the side and and the end. Also intrigued to find this 1994 article denouncing Brenner for Eurocentrism and having thoroughly discredited the “anti-imperialist” trio of “three well-known Neo-Marxists scholars, Andre Gunder Frank, Paul Sweezy, and Immanuel Wallerstein.” in 1977. My eyes glazed over at the response to Brenner, but what he was being denounced for sounded promising!

  28. 28 Steve Owens

    I was meaning end point consumers rather than within the process of production consumers.Sometimes my wife washes the dishes ie produces wet dishes. I dry them ie consumes her product, whether I onsell to my son to put them away is immaterial. Sometimes she washes faster than I can dry ie she overproduces. She then stops washing for a couple of minutes without throwing the household into crisis. Where I agree with Bill is that to turn this into a crisis I need to incorporate a whole cluster of other problems. Excuse me for a moment “Jack stop juggling those dishes and stop using those knives to play sword fighting with your brother”Sorry about that I just had to deal with a cluster of other problems.

  29. 29 Steve Owens

    Arthur your links about overproduction are a bit dated. The Japanese Financed Plants is a link to an article entitled A potholed path for US auto industry, where overcapacity in the auto industry worldwide stands at 27%. The article is dated March 8-2003. The article Dangerous Global Capacity is dated July 1-2001.I guess overcapacity in these years could have an effect years down the track.BTW is you follow the links to the Solidarity site do you think that they meant the irony of the Banner “Lets work together-for a change!”

  30. 30 Arthur

    They appear to be hostile to the overwhelming pressure for US “left” to rally behind Obama in the elections, so I would assume the irony is intended.

    The point of the dated links was to highlight the fact that your choice of the car industry to doubt overproduction preceding rather than following financial crisis, was spectacularly ironic in view of how long its been a well known looming problem, especially noted in that particular industry.

    The US Federal Reserve’s latest estimates on capacity utilization can be found here.

    Note that for Motor Vehicles and Parts, the average capacity utilization from 1972-2008 was a rather low 77.0% (ie 23% unused overcapacity). There was a steady decline until almost half the capacity was unused just before the outbreak of the financial crisis, and then a sudden collapse to 39.5% capacity used by January (ie more than 60% overcapacity!).

  31. 31 Steve Owens

    The article that Arthur linked to “Japanese financed plants” claims that in 2003 the world was overproducing cars at a rate of 27% ie for every 100 cars produced 27 would remain unsold what more can be said, do we really think that Capitalism is this irrational?Google Toyota production and you will find that they produced 9,497,754 cars worldwide in 2007.Google Toyota sales and you will find that they sold 9.37 million cars worldwide in 2007 hardly massive overproduction. Yes we are awash in unsold cars in 2009 because demand has tanked.

  32. 32 Arthur

    Overcapacity refers to the capacity of the plant to produce. The investment in that capacity lies idle and prevents further investment in expanding the industry as would be required for continuing growth.

    Only a tiny excess between actual sales and purchases quickly leads to no room to keep the stocks, so naturally they cut back as soon as that happens. But their capital was invested to supply a demand that turned out to be much smaller than they had counted on (and counted by way of financing including debt). So their ability to pay dividends and repay creditors is less than they expected. Consequently the flow of funds to their shareholders, creditors, suppliers and workers is less than expected, with a chain reaction. Subsequently demand drops further eg due to people laid off in this and other industries not buying cars, and you get spiralling crisis.

    But it doesn’t require an initial drop in demand to kick it off. The starting point is an excess in capacity and supply (often due to competition from other capitals investing to meet the same expected GROWTH in demand – the demand has indeed grown as expected but since Japanese capital including Chinese plants have now also been installed to meet that demand, somebody has to go under on the supply side. Usually these are highest cost, least profitable suppliers – eg Chrysler and GM.

    Time for you to look up some stats yourself Steve. Show us the total numbers over time which according to you should be declining sales in the period leading to crisis.

    It is irrational to produce car plants and run them at half their capacity. Capitalism is that irrational – but only cyclicly.

  33. 33 Steve Owens

    In my post March 27 @ 9.12 I said that you could argue that there had been overproduction of Capital goods.
    But this thread has been about consumer goods not capital goods let me quote Arthur “By overproduction I really do mean “there’s too much stuff on the market” ” March 18 @ 8.15

  34. 34 Steve Owens

    What I think overproduction means. Anarchic unplanned competition between producers leading to goods in excess of current demand. There follows a glut in the market price slashing as producers try not to be the ones holding the unsellable stock.What we have seen recently is demand expanding due to a credit bubble. Once the bubble burst producers were left with a lot of unsellable stock.The question here is how did we get to this crisis by producers outstripping demand or by demand collapsing.People should at this point feel free to use magic words like tendancy for the rate of profit to fall or produce such convoluted arguments that they just get mere mortals lost, whatever, I think Im done.

  35. 35 Arthur

    (Earlier post still not showing but will still try response to Steve’s 1:32pm).

    Yes basic point is anarchy of production. Not necessarily “unplanned” – lots of long term plans by giant transnationals and governments that each own and control separate parts of a social production process that depends on them successfully exchanging outputs and inputs despite conflicts between their separate plans.

    But “demand expanding due to credit bubble” is not quite right. More accurate is credit bubble substituted apparant demand for missing actual effective demand. The orders get placed “on the never never” but ultimately it turns out the buyers could not pay, even though their non-payment, and hence the glut was postponed (by far more than the amount of credit extended since keeping it all going feeds on itself in an upward spiral just as boom ending feeds on itself in a downward spiral).

    Also glut and “market price slashing” initially restrained by cutting back and putting up with more overcapacity, instead of actual glut. Then takes the form of output prices not rising as fast as input prices under inflation. The “demand pull inflation” which stimulates production with credit expansion by increasing profit margins, gives way to “cost push” inflation and falling profit margins. Now we have actual glut, with huge crashes in internationally traded commodity prices. (Anybody remember “peak oil”?) China already actually deflating domestically (falling consumer prices). Others resorting to “quantiative easing” (effectively printing money), to avoid collapse in prices that would result in full financial meltdown.

  36. 36 Arthur

    (response to Steve’s 1:32pm)

    Consumer goods are not and never have been “the market” for capitalism.

    There is now overproduction in consumer goods too and a crisis can start there. But it is more common for it to start in producer goods.

    The current crisis is generally attributed to a “sub-prime” crisis in US housing finance. But that in itself reflects an overproduction of housing – more for sale than the effective demand (demand that can actually pay.

    Housing construction can be considered (durable) consumer goods, although much of what is paid for is the improvements to land resulting from urban infrastructure investments (mainly financed by government debt).

    Extending credit to encourage “sub-prime” loans to risky (and hopeless) prospects was a necessary measure to postpone a crisis of overproduction in the construction industry (and other producer industries for which the construction industry is the main market and a leading economic indicator.

    There is vastly more capacity available to produce housing, steel, cars etc etc etc than there is a market for them. That’s a capitalist overproduction crisis (which always breaks out in a financial crisis). It isn’t just a financial crisis (which can sometimes occur, and be relatively quickly resolved, when there is no underlying overproduction crisis in the “real” economy.

    That is why the general expectation is for at least a long and deep “recession” AFTER the financial crisis is resolved.

  37. 37 patrickm

    Steve you are either not following the discussion or not understanding the very basics of modern logistics. 

    It has been known for many decades that stock levels are kept as low as is optimal, given supply chain constraints seasonally adjusted, and with a close eye on general demand conditions.  It is quite a skill.  ‘Just in time’ management applies to every activity with suitable adjustments. 

    Agriculture still goes through the big actual product gluts, but even in that field, the problems of actual stock levels is very much less than it used to be.  However, if you’re set up to grow wool or produce beef or whatever, then it’s hard to turn that production over to something else. 

    Wine is a good example of a cross-over product between agriculture and manufacturing.  But masses of the capitalist funded car products are never produced to then ‘rot’ in unsold stock piles.  Margins are established, and then order books slow or speed output.    ‘...overproduction being easily resolved…’ is a no brainer because they stop producing!! Overtime stops, 3rd shift stops, 2nd shift stops, hours get limited, so of course ‘…that overproduction alone is unlikely to throw the system into crisis.

    We all know that there is ‘ little danger of overproduction of commodities as for decades they have run on a “just in time” model and with a sophisticated sales approach. They would have a pretty good idea of sales projections and produce accordingly. Not only could ‘You argue that overproduction has occurred in Capital goods, but I havent seen any evidence of overproduction of consumer goods in the auto industry.’  (and you wont because of JIT etc), but you are being told exactly that the problem is that factories have been invested in that don’t return on the investment. If you borrowed money to fund it and you can’t cover that level from the new output levels, then your firm goes under!  So your point ‘- if overproduction of goods is the problem, then producing less goods is the answer. ‘  is just foolish. You said ‘When a company produces too many cars, it can reduce those numbers immediately, lay people off, cancel the night shift, close the plant for a month, it’s not nice but it’s not hard.’   Not realising that it means  “there’s too much stuff on the market” in relation to what is set up to deliver it.  This is ABC stuff so the real point is that real crises need no more than overproduction, they do not need some real Bernie Madoff creativity, and therefore can’t be fixed by re-regulating, and closer control by the ruling elites and their government employed flunkies.

  38. 38 Steve Owens

    Pat we have been discussing overproduction in this thread. Bill said that overproduction was a cluster of concepts. Arthur said no that over production really did mean that “there’s too much on the market,” and you say that “…the problem is that factories have been invested in that don’t return on the investment”I think that the current crisis is due to a cluster of concepts many of which are self re enforcing and I do think that over production involves too much on the market and I do think that the problem has become one where factories dont offer a return.My point has been that over production crisis are characterised by a glut of product leading to the crisis. Not all crisis come from over production your tulip one being a case in point.I agree with you that this is ABC stuff.

  39. 39 Arthur

    “I do think that the problem has become one where factories dont offer a return” – that’s an overproduction, a glut of factories. A factory (or plant capacity) that doesn’t offer a return is as useless for accumulating capital as a car that can’t be sold at a profit or a house that can only be sold to people who won’t be able to pay the mortgages. Accepting there is overproduction of factories and plant capacity (and hence in the industries that produce them) you are in fact accepting that there is overproduction of capital goods.

  40. 40 Lupin3

    Much of the conversation here has tended to a descriptive account of overproduction (and its relative, overcapacity), with special attention paid to the depressing effects this has on the rate of profit.  All of this seems very straightforward, with an exception I shall return to.  For the moment, however, I’d like to make the following points about your case(s) for overproduction:

    While ST/LS has made a strong case for the existence and detrimental aspects of overproduction, very little has been said of the causes for it.  If anything, it seems that your arguments are predicated on its having been created ex nihilo, or if not from nothing then as a consequence of anarchic market competition (the “grow or die” mantra mutating into “grow and die”).  But while the U&R piece makes an attempt at a theoretical construct for how this happens, none of it is “proved” in an analysis of today’s actual economic conditions.

    I realize Arthur has declaimed any attempt to rationalize his position with statistical analysis, and I don’t suggest that is needed at this point (though, if ST/LS really wishes to make an impact, it will be at some point).  But what is needed is a way to ground the theoretical argument with a comprehensive illustration drawn from current experience.  Brenner sketches the outline of such an illustration in his Hankyoreh interview, which in my reading implies the source of the overproduction problem lies at least partially in an inability to absorb the economic confluence of developing countries, primarily China, into the globalized economy.

    This is important because Brenner’s argument about the impact of globalization on Western economies explains how the effects of declines in the rate of profit are offset or otherwise delayed.  Primarily this was accomplished through inexpensive access to massive amounts of Chinese funded debt (here in the US).  This huge capital investment drove down the cost of everything from home to auto to consumer electronics ownership, and facilitated the growth of financial services which ultimately repackaged much of the debt it had originally made possible into collateralized, commoditized packages.

    As a result of this, credit became less expensive and more widely available.  This delayed the effect of declines in the rate of profit by slowing the rate of decline in purchasing power both for consumers as well as producers – ie, reductions in needed collateral and interest rates extended credit to those who wouldn’t normally qualify at all as well as making more credit available to those who’d normally qualify for less.  Brenner’s article speaks of the necessity for geographical expansion of capitalism, suggesting expansion into the American south and west as well as Asia and parts of Europe essentially drove the post-war recovery.  The geographical expansion drove our current boom cycle as well, but the availability of credit was a substitute in the US for geographical expansion.

    This therefore did indeed serve the purpose of creating demand, but since the real wages of most Americans actually declined in this period, the effect on the real economy of this capital injection was destined to be short lived.  American consumers became saturated with debt, and this left the financial sector, tasked with allocating this capital, with fewer options.  Debt saturation was related to real wages, so what was needed was a way to increase the earnings potential of Americans without upsetting the decline in their real wages necessary to minimizing the decline in their employers rate of profit.  Everyone agreed, from “Main Street” to Wall Street to Washington, that real estate was the best way to do this.

    So access to cheap foreign capital, together with monetary policy from Washington, fed the real estate boom.  This had the same effect on the rate of profit as did credit expansion (and indeed is really a consequence of it).  But real estate, unlike capital, is a tangible thing, and when the natural consequence of increased demand increased the overall costs of home ownership beyond the offset of cheap credit, the market peaked.  But the capital kept coming, and the financiers found increasingly creative ways to package the debt, and the sub-prime market drove the industry for a while, until its inevitable collapse.  That collapse has taken with it any means to delay the decline in profit, but one.

    Now here is where overproduction begins to become apparent, on an industrial scale if you’ll pardon the pun.  And here is where I’ll return to what I consider an exception in the otherwise straightforward ST/LS argument: there is a vast difference in cost between overproduction and overcapacity.  Overproduction implies overcapacity as well, but overcapacity alone amounts to…exactly what?  The article linked to earlier suggested there was a 27% overcapacity in Detroit, but said nothing of overproduction.  We can assume that the cost of overcapacity is lost, but that is not especially apparent – it may simply be the legacy of outmoded production, already paid for, which would be more expensive to demolish than to idle.  It may be that the production facilities in use equal exactly those facilities currently financed by capital.  Now certainly even those idled facilities, which in my supposition are already paid for, represent a certain amount of lost capital – a sunk cost.  But do they contribute to the downwardly spiraling forces identified in the U&R article?

    In the end, the issue as I see it, is that the “overproduction” problem is not in Detroit, or New York, but in terms of foreign capital and Western economies’ inability to process it.  But even this is not descriptive of the source of that inability, which must lie in the problem of the rate of profit.  Here is where I wonder about Arthur’s decoupling of overproduction from underconsumption, for while I can understand the U&R article’s position on the necessity for a reduction in wages to increase employers’ profitability, it does seem that, were all employees wages equal to zero, so too would be all employers’ profitability.  So intuitively it seems there must be a more direct relationship between these factors than the ST/LS arguments suggest.

    This post is already too long, so I’ll leave my thoughts on the U&R article’s remedies for capitalism until later, as well as an explanation of the “but one” comment earlier, which amounts to a disagreement about the role of Keynesianism.

  41. 41 Steve Owens

    Arthur I do think that there is a glut of factories now. Now that demand has tanked. Was there a glut of factories when output matched demand well no, that’s my point its been the collapse in demand that defines this crisis.I think that we should work from very clear definitions of terms. If you use the term overproduction to describe production when it both meets demand and when it doesnt it looses it power as a descriptive term. (if alot of capital goods ie factories were being produced and they were effectively being used in the production process then by definition it wasnt overcapacity or over production it was production)

  42. 42 Arthur

    Hi Lupin3, thanks for the thoughtful contribution.

    U&R was a “necessarily half-baked” attempt to start discussion on economic issues more than a quarter of a century ago and lacked statistical illustration then.

    I certainly agree with you that a LOT of work, including statistical work, will have to be done before we have anything like a clear analysis and guide to action in the present situation. I certainly haven’t done that work. Nor will I be able to put much time into it in the immediate future. I am hopeful though that this discussion will be protracted and that many such discussions will be occurring elsewhere stimulated by the new situation. On that basis I am confident that lots of economists and economics students will produce lots of material from the wealth of data available that will make it much easier to do theoretical work on it.

    What struck me about Brenner’s piece is that it identified the current outbreak of crisis as a product of a situation that has been leading towards such an outbreak of a full scale world market crisis since the 1970s, treating the various (weakening) business cycles in that period as relatively minor fluctuations that did not resolve the underlying contradictions.

    This emphasis on the underlying movement in the “real” economy is consistent with U&R and opposed to the overwhelming mainstream focus on its financial surface phenomena.

    At the time of U&R the public debate in Australia was mainly about “wage restraint” and unemployment because real wages and share in GDP had sharply risen at the peak of the post-war boom and unemployment was growing rapidly. The central point to make against attacks on wages was that it wasn’t just the labour market that was out of balance, the whole world economy was out of balance with prices, interest rates, exchange rates etc all over the place compared with historic trends during the phase of prosperity.

    I think Brenner brings that out too, but I’m not familiar enough with the details to comment much on his detailed account.

    My impression at least from your account of it is that there is an overemphasis on the consumer credit side (including housing finance), which may perhaps feed into, or arise from an underconsumptionist view. My understanding is that the expansion of credit and debt is universal, with corporate balance sheets showing debt to equity ratios that were unthinkable in previous periods (dramatically higher than those quoted as dramatically high in U&R). This necessarily implies risk of insolvency at the slightest drop in prices and profit margins.

    I was surprised to read (from the Economic Report to the President) that there is some statistical support for claims that real wages have been stagnant. Closer inspection will be required in view of the widespread perceptions of rising living standards. More relevant for economic analysis is 1) real unit costs of labor – ie what employers have to pay, including “benefits” rather what employees receive, and 2) real disposable income (greatly affected by housing finance etc).

    My understanding is that both of these have been rising, with “big government” playing more and more of a role relevant to the gap between wages and labor costs. Real unit labor costs rising, with profits and labor productivity falling would be closely linked to overcapacity. There is an overhead for plant capacity that still has to be met when it is operated at half capacity. That must produce lower profits, higher unit labor costs and lower labor productivity compared with operating it at full capacity.

    This seems elementary. There is obviously something weird going on when US investments are being financed by Chinese debt. You say “In the end, the issue as I see it, is that the “overproduction” problem is not in Detroit, or New York, but in terms of foreign capital and Western economies’ inability to process it.” If we look at it more abstractly from a global perspective, the process of globalization enabled a wider field for capital investment, drawing larger numbers in the the third world into production of surplus value. But that capital investment is now competing for a share of profits with established capital. As always, manufacturing has moved to where labor is cheapest.

    There isn’t any such thing as “foreign” capital in a globalized world. The Chinese economy relies on selling consumer goods to the US, the Australian economy relies on selling raw materials to China. (I’ts increasingly unclear what the USA does for a living ;-). When you see Chinese debt financing US credit expansion, there has to be some underlying difficulty in Chinese sales WITHOUT US credit expansion. That points to overproduction. (The Chinese peasantry in the interior could certainly benefit from much higher levels of consumption, but that isn’t effective demand because they don’t have anything to pay for it).The potential for crisis exists in the form of commodity production itself.

    Whereas neoclassicals abstract from money as though exchange was through barter, and Austrians imagine that markets embody a collective wisdom rather than herd, or flocking behaviour, the reality is that a producer who produces for the market cannot resume production on the same or increased scale until actually having first converted their produced output commodities into money and then converted the money into fresh input commodities including labor power. There is absolutely no guarantee that they will have a buyer at the right price, and extending credit can only smooth out local anomalies while concealing underlying distortions. A more developed form of this potential is inherent in the increased importance of fixed capital (and hence of “capacity” including “overcapacity”). The value of plant only enters into circulation as depreciation costs over many turnover periods, but the right amount of plant has to have been produced at the right price and in the right proportions, for both replacement and expansion, with sales not completed until years after investment decisions. There is an inherent necessity for a certain amount of overcapacity in every industry (and unemployed labor) to cope with variations (including insurance against risks) just as there is a necessity for some stocks to maintain a “supply” no matter how tightly one may aim for “just in time”.The natural drive of a capitalist economy is to reinvest the profits in expanding production more or less proportionately in the expectation that markets will expand at the same rate. But the final market for consumer goods and services is crippled by the fact that workers only receive the value of their labor power, while luxury consumption of parasites cannot possibly cope with a surplus in cars or houses or steel etc.

    Capitalist accumulation inherently requires either extension of the market (globalization) or intensification by accumulating at a higher rate of organic composition with shifts in the proportions towards industries producing means of producing less labor intensive means of production and consequent devaluation of the capital tied up in less productive plant. The forcible reassertion of that requirement occurs in crises.

    In a post-capitalist economy there could be even greater accumulation – both to more rapidly develop the third world and for R&D to shift more rapidly to less labor intensive techniques. The difference is that devaluation of existing plant wouldn’t be a crisis but merely a reflection of growing prosperity – “creative destruction” actually unleashed, rather than paralysed by private ownership.

  43. 43 Arthur

    Here’s links to a couple of sites that seem to be collecting articles on the crisis.

    Marx and the Financial Crisis of 2008 – nothing since January, perhaps obsoleted by the other one below.


    Radical Perspectives on the Crisis


    There’s too much to keep track of but it would be useful to post links to items that seem particularly worth reading.

  44. 44 Bill Kerr



    Circulation Process of Capital

    (same link repeated, just testing whether html works in the new editor)

    I did some searches of the marxist archive economic works of marx and engels for keywords: overproduction, overcapacity, overaccumulation, underconsumption.

    The above link is the best one I have found so far for explaining overproduction (preferred word from Marx) and underconsumption, that one is not the flipside of the other.

    I was wrong in what I said before about the word overproduction representing a big cluster of concepts.

    “But the assertion that too little money is produced means indeed nothing else than what is being asserted, that production is not identical with realization, i.e. that it is overproduction, or, what is the same, that it is production which cannot be transformed into money, into value; production which does not pass the test of circulation…”

    overproduction is production which cannot be transformed into money (similar to what arthur is saying, lots of stuff that can’t be sold)

    However there is a very big cluster of concepts associated with understanding the term. eg. the marxist understanding of the difference b/w price and value, b/w use value and exchange value, etc. etc. In just taking notes on a single paragraph of Marx I came up with 32 words that need to be carefully defined and understood! So, to move beyond the threshold of surface understanding does require a bit of work.

    What I do to try to understand these terms is to keep a glossary of terms as I go along – wikipedia can be good for a first pass of this and also the marxist archive glossary of terms is useful: http://www.marxists.org/glossary/ (even though some of their definitions are not marxist, eg. see http://www.marxists.org/glossary/terms/o/v.htm#overproduction where they say: ” … “over-production” should really be called “under-consumption” ” (wrong, see the link at the top for a correct explanation). But I did find the marxist archive glossary useful for other meanings such as the distinction between price and value.

    Need to do the same for other interpretations of the crisis too, eg. the Austrian economists. Someone pointed me to a good primer of the Austrian viewpoint: Economics in One Lesson

    If you don’t have time to read all of the Marx “Circulation Process of Capital” document but still want to understand the marxist meaning of overproduction in context then for starters just scan the document using the find word: overproduction. This comes up with a whole series of fascinating extracts.

  45. 45 Arthur

    Just want to mention the importance of this passage from the chapter of Grundrisse that Bill linked:

    First, to the extent that capital does not increase absolute labour time but rather decreases the relative, necessary labour time, by increasing the force of production, to that extent does it reduce the costs of its own production — in so far as it was presupposed as a certain sum of commodities, reduces its exchange value: one part of the capital on hand is constantly devalued owing to a decrease in the costs of production at which it can be reproduced; not because of a decrease in the amount of labour objectified in it, but because of a decrease in the amount of living labour which it is henceforth necessary to objectify in this specific product. This constant devaluation of the existing capital does not belong here, since it already presupposes capital as completed. It is merely to be noted here in order to indicate how later developments are already contained in the general concept of capital. Belongs in the doctrine of the concentration and competition of capitals.

    Unfortunately Marx didn’t publish more than notes on concentration and competition of capitals.

    Its relevant to crisis phenomena (which requires forcible devaluation of existing capital values) but even more relevant to post-capitalist economic calculation.

    Marx frequently refers to “moral depreciation” as well as “wear and tear” as entering into the value of constant capital. This seems to be ignored both by people claiming to advocate a labor theory of value and by opponents arguing that efficient allocation of resources requires some sort of interest rate on funds required by more productive but also more capital intensive production processes to compare with some sort of wage rate for labor or you would always be automatically deferring current consumption to accumulate towards the most capital intensive processes.

    In fact the “economic life” of any capital investment is generally determined by obsolescence rather than actually wearing out. Both under capitalism and socialism old plant becomes worth less than what it cost in human labour BECAUSE it can be reproduced more cheaply due to improving productivity of labor (or replaced with newer technology).

    This HAS to be included in economic calculations and also applies to levels of stockpiles etc which should be minimized BECAUSE it would be cheaper to produce the goods “just in time” as a result of the expected cheapening due to increased labor productivity. That doesn’t require a class of property owners either living off or accumulating profits.

    Hence my view that current methods of calculation such as discounted cash flows could be used with a zero rate of return as the “hurdle rate” (thus producing at levels that soak up unemployment and drive up “wages” to the full value added). The full value added goes to labor (but value added is net of the depreciation arising from productivity increasing with accumulation).

    Zero average profit means that profits are not the source of funds for accumulation. The accumulation is a direct deduction from the value added by labor belonging to the associated producers – eg a poll tax for the purpose of raising productivity by moving to less labor intensive techniques.

    Funding accumulation out of profits is merely an artefact of a separate property owning ruling class (which also diverts surplus from accumulation to its own consumption). The “prices of production” that include all of net investment in profits are irrational (inefficient) as Marx argued and the theories that treat the part of gross investment that actually replaces only the value of virtual depreciation as though it was abstention from consumption by the property owners are purely apologetic.

    To paraphrase Karl “Belongs in the thread on price systems” – which I don’t have time for at the moment 😉

    BTW Veblen is interesting on this too. See “The Overproduction Fallacy”:


  46. 46 Bill Kerr

    I am keeping links here: http://delicious.com/billKerr/economics

    Spent some time reading Tim Duy’s blog, linked to by Paul Krugman in his blog despairing of Obama’s policies. This one is a good sample: When does faith in financial engineering wane?

    It contains recent data, nice graphs, illustrating how bad things have become (including inventory to sales ratio and household saving rate)

    It is critical of Bernanke (and Obama) for financial engineering, propping up bad banks, a policy which continues in different forms

    It is critical of a marxist analysis (“Value is determined by a constellation of social conventions at some point in time”)

    The solution is to shift gears to an overtly inflationary policy direction and to nationalise the banks

    One failure has been not learning the lessons (or lacking the political will to act on those lessons) of the japanese experience, from an earlier Tim Duy blog, And Now we Know :
    “We used to wonder aloud at the intransigence of Japanese policymakers. How could they allow their banking system to deteriorate? Why not take decisive action? Now we know: Fettered to an adherence to the status quo and an aversion to the concept of nationalization, the political will to attack the problem head-on is overwhelmed by the enormity of the financial crisis.”

    My thoughts about this:

    – The Obama administration may become unpopular quickly, as partially illustrated by the AIG bonus scandal

    – Disputes about how best to handle the financial crisis from commentators such as Krugman and Duy in the mainstream press may further mask the marxist overproduction thesis

  47. 47 Steve Owens

    Bill you might be right that the Obama admin becomes unpopular due to the AIG scandal, this despite the fact that Bernanke is a Bush appointee and that the AIG deal was negotiated by Bernanke in September 2008.
    I think that people wont like financial engineering right up to the point that they are introduced to it’s alternative, letting market forces rule. Hooverism is not remembered fondly in the US.
    When I listen to reports on the radio of people being evicted from their homes I can’t but long for the anti eviction groups formed by the Communist Party to chase the landlords agents off. ( this happened in Australia during the Great Depression)

    Where will America find it’s modern day equivalents of Willis C. Hawley and Reed Smoot?

    In case people don’t know Fed Chairs are appointed to 4 year terms.
    And Hawley and Smoot authored a bill that instituted heavy protectionist policies thereby turning the wall street crash into the great depression. Hoover refused to veto the bill desite every sane person (and Henry Ford) pleading for him to kill the bill.

  48. 48 Arthur

    Interesting links. Hope Bill keeps posting the more important ones from his delicious collection here as it saves a lot of time.

    I still have not and cannot catch up with the details. For what it’s worth:

    1. The situation will become much more clear later and there will be plenty of time for analysis with no possibility of effective action while things are still up in the air anyway.

    2. I suspect “policy makers” feel much the same way – ie they haven’t actually got a policy yet but are just firefighting and spinning declaratory policies to avoid actual financial meltdown. (Problem exacerbated by transition between administrations in USA and general decline of USA which nevertheless still remains the global “leader”).

    3. It was interesting that many comments pointedly asked what alternative policy was being advocated in response to exposures of the pointlessness of declared policy. I didn’t see any responses. There’s something VERY glib about the liberal democrats hostility to trying to save the financial system from meltdown (hostility shared with Austrian critics of Keynesian myths). Agree with Steve that they haven’t actually contemplated the well known consequences of just letting it rip.

    4. Nationalization and (pure) inflation to devalue debts may well be the eventual policy direction. Current measures may be merely a stop gap and preparations for making that easier. Problem is the long term consequences may differ all that fundamentally from the consequences of a full meltdown in the financial system – just less “overnight” with more time to adjust to those consequences.

    5. ie There is nothing miraculous about nationalizing banks. They are already insolvent (not just suffering from a panic) and Europe already nationalizing. It doesn’t in itself enable a banking system to keep financing other activity without actually changing the fact that vast amounts of non-bank creditors assets (including savings, reserves, investment portfolios etc) are based on loans that can’t be repaid (and will get MUCH worse with deflationary spiral). That has to be liquidated. Doing it by pure inflation makes it more difficult to get normal activity going again.

    6. AFTER such issues are resolved one way or another (including by a full financial crash and/or massive inflation). We still have the actual overproduction and other disproportions in the global real economy that led to the overextension of credit and bubbles in the first place. eg No easy way to get US housing prices to correspond to capitalized rentals and construction prices or trade balances to balance without major dislocations. Similar distortions in all sectors built up over DECADES.

    7. I do think the ongoing “serious” discussion of the financial stuff (which is of paramount interest to participants) will continue to distract attention from Marxist analysis of the fundamentals (while pure diversions about executive bonuses etc keep general public opinion busy).

    8. There’s going to be a LOT of pressure for protectionism, which can only make things worse. Elites will generally oppose by public opinion will be strongly attracted to it and there will at least be pandering.

  49. 49 Arthur

    Lots of interesting stuff in Chapter 30 of Capital Volume 3 on “Money Capital and Real Capital”.


    Note especially Engels footnote 8 at the end on globalization resulting in a much longer cycle and much bigger crash.


    The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.

    There doesn’t seem to be much confidence that Marx was wrong on this point. But they have to try everything.

  50. 50 Arthur

    Chapter 3 of Engel’s “Socialism: Utopian and Scientific” strikes me as the best short exposition, quite suitable for mass distribution and likely to be well understood by large numbers in the relatively near future. We should spread links to it widely now.


  51. 51 Arthur

    So far I’ve only come across one other writer suggesting that a developing underlying overproduction in the real economy has been unresolved since the 1970s and still requires a massive devaluation of capital for resolution. Its mentioned in passing at the end of this:


    Most of that article and of all others I’ve come across so far are totally focussed on the financial side (or just general waffle).

    Reading more of Brenner’s earlier stuff, there may well be an inclination towards underconsumptionism. Though he now says clearly enough that recovery requires driving wages down which OUGHT to imply he rejects underconsumptionism, its not clear since it is mixed together with other stuff denouncing capitalism for being capitalism.

    There sure doesn’t seem to be much actual Marxism around though there is going to be more and more interest as well as more confusion due to all sorts of outlandish stuff (mainly populist and “anti-imperialist”) posing as Marxism.

  52. 52 Bill Kerr

    Walden Bello argues an overproduction crisis going back to the 1970s (and also underconsumption). For example:

    The Global Collapse: a Non-orthodox View

  53. 53 Arthur

    Thanks for link to Bello. It does trace it back to the 1970s and simultaneously claim both overproduction and underconsumption. Despite the reference to overcapacity I’d say its fundamentally in the tradition of Monthly Review’s long standing underconsumptionism (with the usual tribute to Rosa Luxembourg).

    In particular it discusses sub-prime mortgages without the slightest hint that this implied providing an apparant market for overproduced housing construction that did not correspond to actual effective demand. This seems to be a widespread blind spot. Also implies that shift from wages to profits induces crisis (despite simultaneously talking about falling profits) and no hint that only actual crisis can resolve things by devaluing real assets (as opposed to just pricking speculative bubbles).

    So I’d say that references to overproduction are not references to Marx’s theory.

  54. 54 Lupin3

    This, from the Grundgrisse[


    “To begin with, even on an entirely superficial inspection, the commodity is an exchange value only in so far as it is at the same time a use value, i.e. an object of consumption (still entirely irrelevant here, what kind of consumption); it ceases to be an exchange value when it ceases to be a use value (since it does not yet exist as money again, but rather still in a specific mode of existence coinciding with its natural quality). Its first barrier, then, is consumption itself — the need for it. (Given the present presuppositions, there is no basis whatever for speaking of ineffective, non-paying needs; i.e. a need which does not itself possess a commodity or money to give in exchange.) Then, secondly, there has to be an equivalent for it, and, since circulation was presupposed at the outset as a constant magnitude — as having a given volume — but since, on the other hand, capital has created a new value in the production process, it seems indeed as if no equivalent were available for it. Thus, by emerging from the production process and re-entering circulation, capital (a) as production, appears to encounter a barrier,in the available magnitude of consumption — of consumption capacity. As a specific use value, its quantity is irrelevant up to a certain point; then, how- ever, at a certain level — since it satisfies only a specific need — it ceases to be required for consumption. As a specific, one-sided, qualitative use value, e.g. grain, its quantity itself is irrelevant only up to a certain level; it is required only in a specific quantity; i.e. in a certain measure. This measure, however, is given partly in its quality as use value — its specific usefulness, applicability — partly in the number of individuals engaged in exchange who have a need for this specific consumption. The number of consumers multiplied by the magnitude of their need for this specific product. Use value in itself does not have the boundlessness of value as such. Given objects can be consumed as objects of needs only up to a certain level. For example: No more than a certain amount of grain is consumed etc. Hence, as use value, the product contains a barrier — precisely the barrier consisting of the need for it — which, however, is measured not by the need of the producers but by the total need of all those engaged in exchange. Where the need for a certain use value ceases, it ceases to be a use value. It is measured as a use value by the need for it. But as soon is it ceases to be a use value, it ceases to be an object of circulation (in so far as it is not money). (b) As new value and as value as such, however, it seems to encounter a barrier in the magnitude of available equivalents, primarily money, not as medium of circulation but as money. The surplus value (distinct, obviously, from the original value) requires a surplus equivalent. This now appears as a second barrier.”

    Now, I’m a fairly intelligent, patient, and interested reader. But this is, in its opacity and meandering overcomplexity, an absolute mess. I am quite sure Arthur is more sophisticated in his understanding of Marxian views on overproduction than I (as probably everyone else is as well), but some of his responses to my questions left me similarly mystified.

    If you’re really interested in furthering the discussion (if not the acceptance!) of Marxian philosophy, you’ll need to produce a plain English interpretation of this kind of text; one that actually answers the question of “Why do you consider overproduction to be unrelated to underconsumption?”

    No such argument, as I could understand it, arises in the Grundgrisse.

    In comparison to the it, the article “What is a crisis of overproduction?” is a marvel of concision and clarity. It clearly demonstrates that there is a connection between overproduction and underconsumption, while also illustrating that both are symptoms of the real, underlying problem. According to the Marxmail article’s interpretation, the growth of capital is reduced to near zero by the reduction of labor costs to near their absolute minimum in all competitive industries.

    Thus, while the contradictions of capital drive both overproduction and underconsumption (each of which in turn accelerates the other), –even those products actually sold do not generate any growth in capital,– since wages and prices are competitively minimized.

    The argument about underconsumption vs. overproduction is therefore irrelevent, since any strategy to deal directly with either will not address the problem with the growth of capital.

    All of this seems quite clearly a cluster of complex ideas, as consumption, production, capital, labor and other terms (especially as used by Marx himself) have definite but relatively obscure meanings for ST/LS’s general readership. Too, the connection between underconsumption and overproduction, which is quite intuitive to the uninitiated, is clearly real; and its irrelevancy in terms of the real economy’s problems only makes it all the more important to discuss and dismiss. At least, so it would seem to me.

  55. 55 Bill Kerr

    hi lupin3,

    As the person who put up that link to The Grundrisse, I also have difficulty understanding that paragraph and many other of Marx’s paragraphs.

    For what it is worth my own response to that problem has been to:
    1) Compile a glossary of terms, which I progressively add to and edit as I continue to study
    2) Go back to the original Marx, eg. Capital first chapter where he explains Value (use value, exchange value) in detail. Not that The Grundrisse were notebooks by Marx not intended by him for publication
    3) Take further notes on key concepts: Value, falling rate of profit, etc. etc. many of which are disputed, eg. see the wikipedia entry on tendency of the rate of profit to fall

    Initially when studying new and difficult material I think you lose your voice because it takes a while to integrate the new knowledge into your existing cognitive structures. However, I don’t see any alternative but to keep reading and discussing Marx for those who want to understand the current crisis (as well as other theories that predicted beforehand that capitalism would continue to go through major crisis, eg. the Austrian school). For someone like myself who has been asleep at the wheel for 30 years wrt study of economics it is going to take a while to understand this stuff.

  56. 56 keza

    Note: Issues raised by Lupin have now been taken up in the comments section of the
    Price Systems thread.

  57. 57 Steve Owens

    The paper Unemployment and Revolution was delivered in 1981.
    Australia at the time was in a recession.
    The paper clearly gives the impression that things will get worse.
    “The next phase of the business cycle……involves market collapse….”
    “The whole world economy is out of balance and only an overall crisis will restore that balance…”
    “…..the coming crisis….will be very much deeper than the 1930’s.”
    That was 1981 and the paper is clearly predicting, worse to come. The USA emerged from recession in November 1982 and Australia followed in 1983. The world then experienced the longest sustained period of economic growth.

    The Quotes come from part 5 “Economic Crisis”

  58. 58 Arthur

    The impression in that paper was indeed that a crisis much deeper than the 1930s would likely arrive within a few years, not three decades or more. However no attempt at forecasting was made and an explanation was given as to why such any such attempt would be unreliable. There was also an explicit caveat:

    But the “bust” has not happened yet and we have not yet got a real crisis or massive unemployment. There is still real economic growth and rising prices and even room for some renewed mini-booms because the next phase of the business cycle has not yet begun. During the late 1920’s unemployment also started to rise while prices were still going up and before the actual crash.

    BTW many others were claiming at the time that the situation was already in crisis and trotting out the usual pet accounts of its inevitability that have given “Marxists” a reputation for having successfully predicted 10 out of the last 3 crises.

    One reason that no illustrative statistics were provided was to emphasize that the paper included only an attempt to outline the relevant theory (mainly to back arguments against wage restraint and other panaceas) rather than an attempt at detailed study of the then current situation.

    What I found interesting in the Brenner paper was that it also took the view that the currently developing crisis is the product of a world economy that has been out of balance and heading for crisis since the 1970s with the problems never having been resolved by crisis – contrary to the prevailing view that the relatively mild fluctuations that have occurred during those decades represented a new form of the business cycle that resolved problems without crisis.

    While rejecting the pseudo claims that things have been getting worse and worse and highlighting the progress associated with globalization I would assume Brenner is correct in arguing that this “longest period of economic growth” has involved weaker and weaker growth in each successive fluctuation, with more and more credit expansion required to keep it going.

    I would not attemps to make a concrete prediction now either – beyond again insisting than any recovery following the widely expected grim period we are heading into cannot be a return to prosperity until there has actually been a full scale world market crash bigger than the Great Depression and subsequent major restructing and concentration of capital.

    I do think that although (contrary to my expectations) interest in political economy disappeared for decades, there is bound to be a revival of interest now and it is time to start studying it seriously again.

    Glad to see Steve actually reading the paper. Hope it is of interest.

  59. 59 Steve Owens

    Nah you got me wrong I didn’t read the paper I was there when you presented it at the conference.

  60. 60 Steve Owens

    In Unemployment and Revolution under the section Stimulating demand it says “But we are already at the stage where credit has been rather fully extended.”

    In Arthur’s first post on this thread he says that the crisis was posponed by “…a massive overextention of credit.”

    I’m unsure what to believe, was credit in 1981 fully extended or did they have 30 years worth of credit up their sleeve? I guess they did.

  61. 61 Arthur

    Also seems like they are proposing to try it again with more “fiscal stimulus”, presumably in the hope it could last for many more decades.

    Looks even more overextended to me, so I don’t see much room to maneuver when central bank interest rates already near zero, banks and large corporations already insolvent etc etc.

    The following figures in billions are given for US “debt of domestic non-financial sectors” (table B-69) in the Economic Report to the President 2009. (“Consists of outstanding credit market debt of the U.S. Government, State and local governments, and private nonfinancial sectors.”)

    1965 1,008
    1970 1,420
    1980 3,954
    1990 10,837
    2000 18,104
    2005 26,776
    2008 32,437 (June)

    I don’t know what it all means but it seems to be growing a lot more rapidly than the actual economy, so that looks to me like they were rather fully extended in 1980 and even more overextended now.

    I haven’t done any detailed analysis and don’t know why it didn’t crash in the 1980s or when it will crash. Aall I was claiming then and am claiming now are that the measures being taken are not for resolving any underlying overproduction but for postponing the crash that would resolve it – and that the consequence is we should expect a really enormous crash when it finally does come – as opposed to the conventional wisdom that capitalism no longer needs full scale world market crashes due to clever fiscal and monetary policies whatever, and the common “left” claims that capitalism is continuously in crisis.

  62. 62 Arthur

    BTW, here’s the full section on Demand” (a panacea proposed then and now).

    Keynesians argue that excess production capacity implies a “slack” in the economy which leaves room for employment to be increased by government action to stimulate demand, without necessarily pulling up prices. But this misses the whole point of the adjustment mechanisms that have produced the excess capacity in the first place.

    Excess capacity has appeared because market demand does not allow firms to raise their output prices enough to maintain profit margins. Any stimulation of demand must therefore produce a rise in prices before it will produce an increase in output. There would be “slack” if plant was being underutilised because of a fluctuation in demand and the normal adjustment to it. But there is no “slack” when profit margins have already fallen. There is just “excess capacity”.

    Once excess capacity has appeared, attempts to stimulate demand by extending credit with the budget deficit, amount to buying up the overproduced goods on the “never-never”. Extending credit means extending debt. Ultimately there has to be a real market or the postponement of bankruptcy by extending credit only adds to the size of the crash when it finally comes.

    That of course may not be such a bad thing. There is no harm in demonstrating what heights of prosperity could be achieved by the permanent boom of socialism at the expense of a deeper crash by capitalism when it fails to maintain that prosperity. But we are already at a stage where the credit has been rather fully extended. While governments should and will continue to extend it as long as they can, that may not be all that long. Governments go bankrupt too.

    While it was certainly based on and fostered an impression that things would come to a head much sooner than they have, I don’t see any direct inconsistentcy with what actually happened or anything in recent developments, such as some governments already facing bankruptcy, that would refute it.

    Also note that it argued in favour demonstrating what could be achieved if modern industry was not limited by capitalism so that the contrast between the growth in living standards and the resulting would crash would be all the more stark. I think that was a lot better approach than most of the “left” analysis that has tried to downplay the actual improvement in living standards and tries to blame the resulting crash on “greedy speculators” etc instead of on capitalist social relations being incapable of sustaining that without crisis.

  63. 63 Steve Owens

    The current crisis is a great opportunity to get some ideological clarity.If the stimulus packages work then we can all believe in John Maynard. If the packages dont stem the tide but the economy dips and then rebounds we can all convert to the neo classical school. If the crash dwarfs the Great depression then no one will again accuse Engles of supercharging Karl’s conclussions.
    Whatever happens it remains fasinating.
    The only thing the G20 meeting lacked was someone emerging from the meeting waving the agreement over their head and saying “economic stability in our time” maybe they are leaving that till they get off the planes in their home countries.

  64. 64 Steve Owens

    Arthur those figures you produced about outstanding credit market debt don’t look that scary. If you plotted them against house prices say here in Adelaide well a 2K house in the 1960’s is now a 300K house.
    There’s a couple of things more, the idea that debt by itself is bad is something we should leave well alone. Debt’s very useful it lubricates the economy it only becomes “bad” if you can’t meet the repayments. As a teacher of myself and Patrick used to say “always run a business on debt” as Allan Bond used to say “always put the debt in someone elses name”
    Also you use the term actual economy which I find mystifying as under Capitalism todays “actual” economy may well be tomorrows shattered dream. ie if you are extracting gold at a cost of $400 an once you have a gold mine. If tomorrow the price drops to $390 an once youve just got a hole in the ground.
    Look at Sons of Gwallia second biggest gold producer in Australia manage to go broke during a gold boom. Some people just arnt cut out to run a business.
    Just being serious for a moment I think that the escape from crash in the 1980’s is more complex than just an extention of credit although under Regan credit mainly from Japan did get a fair workout. I also think that growth in the 1980’s was funded by debt,and by a shift in the wages/profit relationship through both things like the Accord and by outright class struggle in the smashing of the SEQEB workers ,the BLF, the pilots and in the UK the miners and the liverpool dockers and the fleet street unions and in the US the air traffic controllers. Growth was also fuelled by the transfer of assets from the public to the private sector along with the deregulation of the financial system.
    There were also technological boosts such as a telecomunications revolution and a computerisation revolution. Plus some sectors did crash ie South American finace crash. Asia economic melt down,the dot com bubble and crash, and the telecomunications crash. Even people like Professor Brain who predicted the Asian economic meltdown were surprised that the Australian economy didn’t follow but there again we were saved by the buying power of the Chinese. Another thing that promoted growth was the collapse of the USSR. No longer did America have to fund so many client states. Capital was able to open new markets in what was left of that particular set of workers paradises.

  65. 65 Bill Kerr

    Steve (not being serious):

    “There’s a couple of things more, the idea that debt by itself is bad is something we should leave well alone. Debt’s very useful it lubricates the economy it only becomes “bad” if you can’t meet the repayments. As a teacher of myself and Patrick used to say “always run a business on debt” as Allan Bond used to say “always put the debt in someone elses name” “

    I found this article, the marginal productivity of debt which argues that the debt-to-GDP ratio is the crucial factor and that:

    – in the 1950s this ratio was 3 ($1 of debt produced $3 GDP)
    – after 1971 the ratio fell below 1 but was still positive
    – after 2006 the ratio became negative and this is what triggered the economic collapse

    Not sure but this might fit an Austrian type analysis which doesn’t deny overproduction – sees it as a capitalist correction course mechanism – but sees the real problem arising when the signs of overproduction are masked by government monetary policy

    PFINE (posted for information, not endorsement)

  66. 66 Bill Kerr

    another interpretation of the current crisis for bad marxists is contained in this book review : Prophet of Innovation: Joseph Schumpeter and Creative Destruction, by Thomas K. McCraw:

    “Inverting Marx’s prophecy, Schumpeter said it is not the immiserated who revolt, but those who have benefited from capitalism’s fruits … Capitalism, then, formidable as it appears, is sociologically fragile. And capitalism is sociologically fragile because it is so economically successful”

  67. 67 Steve Owens

    Bill I couldn’t agree more with the article about marginal productivity of debt. Marginal productivity is not in itself an argument against debt. If you borrow 100k for a return of 50K all other things being equal you should do it. If the next 100K of borrowings only nets 25K you should still do it.
    Keynesians have argued going into debt during a recession will soften the downswing whilst the debt can be repaid during the upswing that will follow.
    The neoclassical economists have argued that the swings are best left to market forces and that distorting the market with stimulus packages will lead to a worse outcome.(the assumption being that markets are the only true measure of efficiency)
    The Marxists have a tradition of arguing that Capitalism is fated to a terminal collapse.
    That’s whats so interesting we have a front row seat as these theories get tested.
    The G20 are going to stimulate the world economy with 1 trillion dollars of borrowed money they will either succeed or dig a deeper hole.
    If they fail we will get to see if market forces can stabilise the world economy.
    If that fails well all the Marxists can write I told you so articles.

  68. 68 Steve Owens

    Bill Its been 20 years since I read Schumpeter seriously. I think your quote gives some of the reason why Ive left many of his works unread. Capitalism as sociologically fragile. Apart from his joke about the horse that’s one of the funniest things Schumpeter ever said. Capitalism is sociologically strong. Which example to use is the problem. The Sydney Gay mardigra is a good one, starts off with a brutal bashing of gays by the NSW police. It currently is a money making extravaganza with a police contingent. Or should I point to the almost non existent anti capitalist forces anywhere in the world. Or to the co option of the entire Labor movement. Find me an anti capitalist labor leader (they used to exist people like Mann and Brookfield)
    Bill by all means throw Marx at me but Schumpeter?

  69. 69 Steve Owens

    Bill just to clarify. That article about marginal productivity of debt. I agree with the article that excessive debt has caused the crisis, its me that has been argunig that it is a Global Financial Crisis and you have been arguing that it’s a crisis of overproduction. My earlier comments about debt were no more than to point out what an intergral part debt plays in a modern economy. As to the authors comments about returning to the gold standard that could indicate that they are part of the Austrian school, the Objectivist school, a Libertarian or just a loon.
    I was reading the Economist this morning and they were making the point that Capitalism was so successful due to its ability to adapt to challenges that arise from both within a country and to external threats. ie it is a sociologically stable system.

  70. 70 Arthur

    Been busy at kasama.

    Hope to catch up soon.

    Did read the link on “marginal productivity of debt” – classify as “just a loon”.

  71. 71 Bill Kerr

    Brenner has written some books predicting the current crisis:

    The Economics of Global Turbulence (2006)

    The Boom and the Bubble: The US in the world economy (2003)

  72. 72 Bill Kerr


    An earlier article by Brenner, January/February 2008, which has more detail about the economics leading up to this crisis – data taken from the Afterword of his 2006 book “The Economics of Global Turbulence”

    I’m not certain about the significance of this but it still seems to me that Brenner is in part arguing an underconsumption thesis (in the section headed ‘Brutal Corporate Offensive’)

  73. 73 Arthur


    I agree with you that Brenner’s earlier article has a more underconsumptionist tone. See also my reservation mentioned in response to Lupin3 above re overemphasis on the consumer credit side (including housing finance), which may perhaps feed into, or arise from an underconsumptionist view.

    I still don’t know what to make of the underconsumptionism you have drawn attention to as it seems radically incInsistent with Brenner’s remark that resolution of crisis requires reducing price of labor. Main point of underconsumptionist is precisely to deny that reality and if Brenner acknowledges that reality I don’t see how he could seriously accept underconsumptionism. So I am still open to the possibility that its more connected with denouncing capitalism for being capitalism (and hence restricting consumption of masses etc).

    This bit actually says that profits have been depressed when you ignore the tone:

    Non-financial corporations, during this expansion, have raised their profit rates significantly, but still not back to the already reduced levels of the 1990s. Moreover, in view of the degree to which the ascent of the profit rate was achieved simply by way of raising the rate of exploitation — making workers work more and paying them less per hour — there has been reason to doubt how long it could continue.

    But then it’s immediately followed by this bit, which certainly sounds underconsumptionist:

    But above all, in improving profitability by holding down job creation, investment and wages, U.S. businesses have held down the growth of aggregate demand and thereby undermined their own incentive to expand.

    The combination of denunciation with analysis also occurs in Marx and is a rich source of quotes used in claiming his theory was underconsumptionist.

    PS Thanks for Brenner book links. Not in stock at Borders (Lygon) or Readings.

  74. 74 Bill Kerr

    Here is Paul Krugman’s (modern Keynesianism) answer to the question that “debt got us into this so how can more debt get us out?”

    The cycle then went like this: the economy races to the ceiling during a boom, and stays there for a while. Eventually, however, overcapacity builds up, investment starts to fade, and a self-reinforcing slump takes hold. This pushes the economy to the floor. The depressed economy eventually revives when a combination of depreciation and growth in sources of demand not tied to the business cycle starts to create a shortage of capacity, which leads to an upward trajectory, and the whole thing starts all over again. (Yes, we can do this with equations …)

    What Koo is arguing for is something similar, but with debt playing the role played by capacity in the old trade cycle. When the economy is growing, taking on more debt seems OK, and rising debt feeds rising spending, which feeds the boom. Eventually growth has to slow, however, and the debt starts to drag down spending, which reduces income, forcing more deleveraging, and so on to the floor. Then debt slowly gets paid down, until the cycle is ready to start again.

    This suggests a prolonged slump. In particular, it tells us not to get too euphoric over “green shoots” and all that. Yes, we may — may — be approaching the “floor”, where the free fall ends. But it can take a long time, many years, before balance sheets are sufficiently repaired for the economy starts to climb off that floor.

    It also suggests a positive role for fiscal expansion — and an answer to the line that debt got us into this, so how can it get us out? What this style of modeling suggests is that over the course of the whole cycle, the problem isn’t so much excessive debt as the fact that everyone tries to increase or reduce debt at the same time. What deficit spending can do is stabilize things: you have one big player in the economy that is increasing debt when the economy is stuck in a paradox-of-thrift world, then pays that debt down when the private sector is happy to borrow.
    Balance sheets and the trade cycle

  75. 75 Arthur

    The point Krugman ignores is that “fiscal expansion” is precisely what has been done for the past few decades to postpone a crisis that would have broken out much earlier without it. That has resulted in a financial crisis.

    Further fiscal expansion might be able to postpone it some more, but cannot resolve it, but only end in a bigger financial crisis. Resolution requires massive devaluation (and concentration) of capital.

    The rhetoric has all been anti-Keynesian until recently. But the actual reality was prolonged Keynesian fiscal expansion. The revival of Keynesianism in theory as well as practice simply means more of the same. It gets harder when interest rates are zero and there’s still no “profit of enterprise”.

    Basically I think they are doing everything they can to avoid a financial panic and avoid mistakes that would intensify the current financial crisis. But that does not, and cannot, resolve the underlying overproduction crisis.

  76. 76 Arthur


    Keynesians have argued going into debt during a recession will soften the downswing whilst the debt can be repaid during the upswing that will follow.
    The neoclassical economists have argued that the swings are best left to market forces and that distorting the market with stimulus packages will lead to a worse outcome.(the assumption being that markets are the only true measure of efficiency)
    The Marxists have a tradition of arguing that Capitalism is fated to a terminal collapse.

    Both “Keynesians” and “neoclassicals” stand refuted by the current situation.

    Both “Austrians” and Marxists recognize that capitalism is a system of dynamic disequilibrium based on anarchic market forces very different from the mechanistic picture of “Keynesians” and “neoclassicals”.

    Neither believe in “terminal collapse”.

    That’s whats so interesting we have a front row seat as these theories get tested.
    The G20 are going to stimulate the world economy with 1 trillion dollars of borrowed money they will either succeed or dig a deeper hole.
    If they fail we will get to see if market forces can stabilise the world economy.
    If that fails well all the Marxists can write I told you so articles.

    The G20 are trying to (and may succeed in) avoiding a financial meltdown. Claims that this could “succeed” in returning to prosperity rather than prolonged depression are purely for “maintaining confidence.

    Whether or not there is a financial meltdown, “market forces” would eventually generate another boom and bust cycle (never “stability”). Its just a LOT more destructive with a financial meltdown than without.

    “Austrians” will blame both financial meltdown and depression on “government”. Marxists will seek to establish working class government.

    Pseudos will sit on the sidelines (not even in the “front row”) and say “I told you so” (whatever happens).

    Marxists will be busy seeking to change the world by ending the reign of “market forces”.

  77. 77 Bill Kerr

    SBS TV 8:30PM tonight (Tuesday):
    Cutting Edge: Wall Street: The Meltdown

  78. 78 Bill Kerr

    A tale of two depressions

    Some data and graphs which demonstrate that “the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30”

  79. 79 Steve Owens

    Bill it always worries me when people write articles that are scarry without providing counterbalancing information.
    Why compare the crash of 2008 with the crash of 1929 (that was followed by the Great Depression) while omitting the crash of 1987 (that was followed by the recession of 1991.)
    Here’s what I think, the crash of 1987 was as big as the other 2 but doesn’t fit the scarry senario. It’s hard to run around sayin “the sky is falling , the sky is falling” if in exactly the same circumstances the sky didn’t fall.
    When historians produce half histories the only question is why?

  80. 80 Arthur

    The crash of 1987 was nowhere near as big as the others – and there were correspondingly few cries that “the sky is falling”.

    The figures so far do show a crash comparable to the 1930s. The article suggests that policy responses (lower interest rates, monetary and fiscal expansion) are grounds for optimism compared with the 1930s. An equally plausible conclusion would be that the underlying problems may be deeper since those policies have not so far prevented the outcomes being just as bad as in the 1930s.

    Whether or not short term forecasting is feasible at all in this situation (which I doubt), its quite clear we don’t have an adequate basis for engaging in it.

    What we should have, and propagate, is an understanding of the underlying contradiction between social production and private appropriation that inevitably results in both crisis and revolution, as opposed to the cynical faith in capitalism espoused by the pseudos.

  81. 81 Steve Owens

    The crash of 87 was the “greatest single day loss that Wall St had ever suffered.”(as in not as big, bigger)
    I didn’t say that people ran around saying that the sky is falling then, I’m saying that people are saying it now as in the article Bill linked to.
    Figures so far show that people using figures of 2008 to draw comparisons with 1929 are snake oil salesmen.
    Whats cynical faith? Unfaith faith? Them dam pseudos arnt running amoke with false faith are they?
    BTW In 1981 Capitalism was ripe for a depression bigger than the 1930’s and then we had the biggest single day crash followed by a world wide recession but Capitalism just borrowed it’s way out of trouble. And boomed on for another 15 years and you still think you understand things pretty clearly hmmmm.

  82. 82 Bill Kerr

    arthur wrote:

    Both “Keynesians” and “neoclassicals” stand refuted by the current situation.

    Both “Austrians” and Marxists recognize that capitalism is a system of dynamic disequilibrium based on anarchic market forces very different from the mechanistic picture of “Keynesians” and “neoclassicals”.

    Neither believe in “terminal collapse”

    What I would like to see (and am working on) is an expansion of this thumbnail

    wrt to the neoclassical / Keynesian mainstream synthesis I think Krugman is suitably modest in his recognition of reality and so is just a pessimist who won’t quit the mainstream:

    And Keynes explained why: in the absence of an effective monetary or fiscal policy, a recession would have to go on until

    “the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency”

    So this could go on for a long, long, long, long time.
    Use, delay and obsolescence

    I searched for an explanatory document on the austrian school attitude to equilibrium and found this one which might be a worthwhile primer

    And here is a relevant book: Mark, Hayek and Utopia by Chris Matthew Sciabarra

  83. 83 Steve Owens

    Hi Bill if you google 87 Crash Vs 97 Market, charts and stories of the 1987 stock market, you will see a graphic comparison between 1929 and 1987 showing them to be very similar I repeat very similar

  84. 84 Arthur


    I do remember screaming headlines about the stockmarket crash of October 1987 and being asked whether it was the crisis expected in U&R (or more like told that it was). I replied that it wasn’t.

    My view is that the present one probably is (though I don’t rule out further fluctuations before it gets as deep as the 1930s and STILL won’t make ANY short term forecasts).

    Like it or not, you are stuck with the fact that while I certainly expected a crisis bigger than the 1930s much sooner than it (still hasn’t) happened, I am NOT among the people who have been stupidly claiming capitalism is continually in crisis. But I am proudly among those claiming crisis is inevitable when it was very unfashionable to say so.


    In expanding that thumbnail I think we need to tackle the Austrians “strength” as its weakest link. ie Only communism can unleash the forces of creative destruction and liberate the free enterprise of those “who only work here” from the fetters of private ownership by parasites.

    This approach is diametrically opposed to the striving for “harmony” characteristic of the pseudos. We want a more dynamic economy, not the stultifying bureaucracies of capitalism both East and West.

    Capitalism did unleash bourgeois enterprise from the shackles of feudalism. But the realities of finance capital today are that it is parasitic and the popularity of CEOs who actually perform the functions of capitalist entrepreneur for a remarkably small fraction of the profits of enterprise has never been lower.

    BTW I’ve now finished both the Schumpeter article and the working paper on Austrians. (Also finished re-reading part 5 of Vol 3 on finance – “Division of Profit into Interest and Profit of Enterprise”).

    Interesting that Schlesinger identifies something rather like the pseudos as the “sociological” fragility of capitalism.

    Re Krugman on Keynes re protracted recession till existing stocks used, decayed or obsolete. I suspect this reflects the belief that monopoly capitalism prevents the destruction of capital values that was characteristic of the pre-monopoly cycle. My view is that something like that does account for the much longer periods between crises (with relatively minor fluctuations). But monopoly was well established before the great depression and cannot ultimately avoid massive devaluation as the only way out of depression. Just makes it more intense when it finally breaks through. The 1930s depression didn’t end with the New Deal but with WWII.

  85. 85 Steve Owens

    Just back to the Great Depression, my take on it is that the great depression was an abberation rather than the likely and predictable outcome for Capitalism.
    I think that policy blunders turned a simple recession into a disaster. Ok what were these policy disasters
    1 Failure to support Banks when there was a run on. Banks because they are always technicaly insolvent(ie always lend more $ out than they can immediatly access) can never survive a “run” without the state helping out. Because the financial sector is essentual to Capitalism governments are insane if they let the banks go under. (it would be better to risk the insovency of the country as bank failure could well result in that outcome) Foriegn take over of banks and nationalisation are both preferable to the collapse of the banking system.
    2 commitment to the gold standard. Gold has very little utility value and was a fetish, if the currency was backed by gold the people felt comfortable but this is illusory as the gold standard was deflationary and thats the last thing you need in a recession, it would be preferable to engage in quantitive easing. Adherence to the gold standard was such a mistake that you can chart countries emergence from the depression with their abandonment of the standard.
    3. Protectionism. As I have written before the adoption of protectionist measures under Hoover was insanity.
    4. Commitment to balanced budgets. Even people like Roosevelt ran balanced budgets. Just like real people countries need to borrow when times are bad and repay in good times ( the clowns that ran Australia werent even prepared to deffer debt repayments and adopted the premiers plan read Bank of Englands plan.)
    Thats why I think we are heading for a recession and not a depression although insanity can grip our leaders and they may well make poor choices lets hope they dont for as bad as the great depression got there was no upside for the working class who did not rise to sieze state power but were ground down. The Great Depression resulted in zero workers revolutions just facsist ones.

  86. 86 Arthur

    There’s a general (though not universal) consensus that the Great Depression was seriously intensified by the sorts of policy errors that Steve mentions, and that similar errors are being avoided today.

    But one needs an awful lot of faith in capitalism to believe that it only has recessions and anything bigger is merely an “aberration”.

    Booms leads to busts and long big booms lead to long big busts.

    Depressions are depressing and do produce defeats for the working class.

    So faith that capitalism has overcome its need for recurrent crisis is perennial.

  87. 87 Steve Owens

    If theres only been one depression in living memory then its an aberation. If another one happens then we can start to talk of a pattern. My views on Capitalism are developed by study of evidence not faith Ill leave that to people who believe stuff that has little evidential basis.

  88. 88 Arthur

    Problem with all the items of faith that Steve calls “evidence” is that these policies have been fully used to postpone crisis for literally decades – and here we are, with faith that they can achieve more than postponement.

    1. Banks aren’t just facing a “run” that can be overcome by providing liquidity. They have more liabilities than assets, ie are bankrupt. This requires complete reorganization of the financial system and liquidation of trillions.

    2. Last remnants of gold convertibility were abandoned by Nixon in 1971. Has not prevented “Global Financial Crisis”. Irrational need for something “solid” as money still a recurring feature in crisis.

    3. Protectionism. So far so good with Obama’s “buy American” mainly pandering rather than actually unleashing trade war. But pressures are rising in a “prisoners dilemma” game. World Bank reports most of the G20 implementing (so far minor) protectionist measures already.

    4. Budgets have been unbalanced for decades – and here we are.

    When something hasn’t happened in living memory, people forget. That’s all.

  89. 89 Bill Kerr

    hi steve,

    I see Paul Krugman as an honest Keynesian. Although he thinks we can avoid another Great Depression he is not optimistic and warning everyone not to expect a quick recovery (“Don’t count your recoveries before they’re hatched”)

    Summary of his reasons:

    1. Things are getting worse (industrial production, housing)
    2. Some of the good news is not convincing, eg. Goldman Sachs just the other day said it was going to give the government bailout money from last year back, sounds good for confidence – but they have actually changed their calendar so the month of December 2008 has disappeared off their books!! (more here and here )
    3. There may be other shoes yet to drop (commercial real estate, credit card, Japan, Europe)
    4. Even when its over it won’t be over – “Don’t be surprised if unemployment keeps rising right through 2010”

    In general the ruling class is desperate to say things are better than they really are since consumer confidence / spending is something they want more of – so our politicians are systematically saying things are better than they really are, which makes me think they must be pretty bad since even their spin is usually “prepare for bad times”. Marxist and Austrian analysis still being kept out of the mainstream media even though other approaches seem discredited by what has happened

    btw the comments to this Krugman article are to be found here (due to a NYT technical glitch)

    Following one of those comments I found this interview with Joseph Stiglitz who is also pessimistic and skeptical about a quick recovery

  90. 90 Bill Kerr

    forgot to include the link to the original Krugman article which I summarised in previous comment:

    Green Shoots and Glimmers

  91. 91 Bill Kerr

    another issue is that mark to market accounting standards of banks have just been eased so that banks can now estimate for themselves what their assets are worth – this astonishing information, if I have interpreted it correctly, supports arthur’s thesis that if the real state of bank bankruptcy was known then panic would ensue

    FASB eases mark to market rules for US banks

    Another financial atom bomb

    Mark-to-market means that banks have to value their assets at market price. When banks have worthless assets that nobody wants to buy, that used to mean bad news for the bank, as if a fruit stand were full of rotten apples. Not anymore.

    Thanks to this change, banks can just make up what they think the assets “should be” worth. This will make it seem as if the banks are doing much better, and we will most likely see a big change already in the first quarter reports that are coming out soon.

  92. 92 Steve Owens

    Hi Bill I haven’t yet but will read your links.
    I fully expect this coming recession to worse than 1990’s or 1980’s or 2001, on the basis that it will be a synchronized recession so I expect that it will last several years and official unemployment will top 10%.
    Why I think that the economy wont spiral down into depression is that there’s a tension between the economic cycle and the economic trend. I think that the trend will trump the cycle in the long run as it has in the past.
    As to this recession becoming a depression based on the fact that there’s a massive build up debt may I remind you that this was the same scenario leading up to the 1987 crash. If you remember the debt problem was so obvious in 1986 that they called the loans “junk bonds”. So you had an economy fueled by “junk bonds”, the bubble burst Capitalist like Skase fled, Bond went to prison, Elliot almost went to prison and HolmesaCourt conveniently died leaving his wife with some money. The recession that followed almost took Rupert Murdock down. I agree that there’s more to come but there are also US banks like Wells Fargo that are doing well.

  93. 93 Bill Kerr


    I agree that there’s more to come but there are also US banks like Wells Fargo that are doing well.

    Disputed here: credit-cost-smoke-at-mirrors-at-wells-fargo

    I don’t understand all the detail but it seems like smoke and mirrors all the way down

  94. 94 Steve Owens

    Hi Bill interesting link, thats half the fun of the market some analists say bad things some say good, that way someone always says “see I was right”
    Why I think Wells will be ok is that in this crisis there is a division between merchant and retail banks. Im not that familiar with Wells but Im assuuming that they are mainly retail.
    Interestingly the Australian big 4 have done well and look to emerge from the crisis with a bigger market share. Even Maquarie which early pundits were writing off has held up pretty well.
    I say this with one caviate which is that short selling has been suspended in Australia. It will be interesting if the shorts give the Banks a work over when the restrictions are lifted.

  95. 95 Bill Kerr

    One thing that needs to be done is to develop a clear critique of mainstream neoclassical economics

    I found this paper which seems great to me:
    What is Neoclassical Economics? (also published here in the post-autistic economics review)

    It identifies three fundamentals of the neoclassical (NC) method: individualism, instrumentalism and equilibrium

    From the outside it looks like this:

    … the person is defined as a bundle of preferences, her beliefs reduce to a set of subjective probability density functions, which help convert her preferences into expected utilities, and, lastly, her Reason is the cold-hearted optimiser whose authority does not extend beyond maximising these uilities …

    NC operates through a wide variety mathematical models and so it can appear to be scientific, if the underlying fundamentals are not grasped and critiqued

    The paper points out that some criticisms of NC economics miss the target because it has evolved over time and the criticisms do not take note of the evolution. eg. the old idea that economic actors are always informed and rational has evolved into something else

    The authors explain how the NC hegemony has prevailed in economic departments, that the underlying fundamentals are usually not known to the practitioners either!

    There may be other good critiques, I’m not sure. But this paper helped me see inside the black box of neoclassical economics and offered a reasonable explanation of why it has been dominant for many years up until now.

  96. 96 Bill Kerr

    I don’t know enough to say whether you or arthur are correct steve. I would point out, though, that there is another factor to take into account –> government policy in the face of the crisis may make thing worse.

    Stiglitz Says Ties to Wall Street Doom Bank Rescue

    Summary, with a few quotes interspersed:

    TARP not large enough to recapitalise Banks

    “We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

    Obama advisers are too close to Wall Street, he speaks of a revolving door b/w Treasury and Wall Street which reinforces a flawed mindset

    $787 billion stimulus is flawed because too much of the spending is after 2009 and it devotes too much money to ineffective tax cuts

    The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

    The current strategy just recreates the housing bubble, it won’t create a long term solution, just kicks the can down the road and will lead to a Japanese style malaise

    They haven’t thought enough about the determinants of the flow of credit and lending

  97. 97 Steve Owens

    Bill I think that we should keep in mind the limiting factors during this crisis.
    Limiting factor number 1 The stock market
    The market went into free fall in September but by December it was widely realized that the market had been oversold. This was evident by companies selling for less than their net tangible assets. Hence the Bear market rally that we have seen in 2009.
    Limiting factor number 2 The US housing market
    Again a case of overselling where houses became cheaper than the cost to replace them plus the US government giving US banks money at less than 1% means that mortgages in the US are priced at 4% which has again has lead to a mini housing boom.
    Factor 3 is the important one and factor 3 is Chinese savings. China is sitting on lots of money and they are spending it wisely.
    They are currently buying up resource companies at bargain basement prices plus they are now stock piling base metals in preparation for their next growth surge. This is important to Australia because it has meant that base metals like copper and nickel have regained a lot of their pre crash prices.

  98. 98 Arthur


    Thanks for link to Real-world Economics Review (formerly post-autistic).

    Seems likely to become a forum within which debates around revival of serious left economics will occur, so well worth monitoring and participating – for same reason U&R was presented at a 1970s radical/alternative political economy conference.

    From my quick look so far though (including pp1-19 of issue 48 .pdf) it bears an eery resemblance to that 1970s phenomenon, perhaps with even greater hand-waving emptiness that inevitably merely reinforced the mainstream by illustrating the absence of any serious alternative.

    The critique I believe we actually need is along the lines of these comments by a reviewer of Marx’s Vol 1 included in the afterword to 2nd german edition

    “The one thing which is of moment to Marx, is to find the law of the phenomena with whose investigation he is concerned; and not only is that law of moment to him, which governs these phenomena, in so far as they have a definite form and mutual connexion within a given historical period. Of still greater moment to him is the law of their variation, of their development, i.e., of their transition from one form into another, from one series of connexions into a different one. This law once discovered, he investigates in detail the effects in which it manifests itself in social life. Consequently, Marx only troubles himself about one thing: to show, by rigid scientific investigation, the necessity of successive determinate orders of social conditions, and to establish, as impartially as possible, the facts that serve him for fundamental starting-points. For this it is quite enough, if he proves, at the same time, both the necessity of the present order of things, and the necessity of another order into which the first must inevitably pass over; and this all the same, whether men believe or do not believe it, whether they are conscious or unconscious of it. Marx treats the social movement as a process of natural history, governed by laws not only independent of human will, consciousness and intelligence, but rather, on the contrary, determining that will, consciousness and intelligence. … If in the history of civilisation the conscious element plays a part so subordinate, then it is self-evident that a critical inquiry whose subject-matter is civilisation, can, less than anything else, have for its basis any form of, or any result of, consciousness. That is to say, that not the idea, but the material phenomenon alone can serve as its starting-point. Such an inquiry will confine itself to the confrontation and the comparison of a fact, not with ideas, but with another fact. For this inquiry, the one thing of moment is, that both facts be investigated as accurately as possible, and that they actually form, each with respect to the other, different momenta of an evolution; but most important of all is the rigid analysis of the series of successions, of the sequences and concatenations in which the different stages of such an evolution present themselves. But it will be said, the general laws of economic life are one and the same, no matter whether they are applied to the present or the past. This Marx directly denies. According to him, such abstract laws do not exist. On the contrary, in his opinion every historical period has laws of its own. … As soon as society has outlived a given period of development, and is passing over from one given stage to another, it begins to be subject also to other laws. In a word, economic life offers us a phenomenon analogous to the history of evolution in other branches of biology. The old economists misunderstood the nature of economic laws when they likened them to the laws of physics and chemistry. A more thorough analysis of phenomena shows that social organisms differ among themselves as fundamentally as plants or animals. Nay, one and the same phenomenon falls under quite different laws in consequence of the different structure of those organisms as a whole, of the variations of their individual organs, of the different conditions in which those organs function, &c. Marx, e.g., denies that the law of population is the same at all times and in all places. He asserts, on the contrary, that every stage of development has its own law of population. … With the varying degree of development of productive power, social conditions and the laws governing them vary too. Whilst Marx sets himself the task of following and explaining from this point of view the economic system established by the sway of capital, he is only formulating, in a strictly scientific manner, the aim that every accurate investigation into economic life must have. The scientific value of such an inquiry lies in the disclosing of the special laws that regulate the origin, existence, development, death of a given social organism and its replacement by another and higher one. And it is this value that, in point of fact, Marx’s book has.”

    The remainder of that afterword is also highly relevant in contrasting Marx’s critique of classical political economy with the “post autistic” critique of neoclassicals.

    BTW Following your offline question on Marxist responses to the Austrians I have been re-reading Bohm-Bawerk and Hilferding

  99. 99 Arthur

    re Stiglitz, his critique that that they are just trying to kick the can down the road a little bit is consistent with my view that they don’t actually have a policy yet but are, as patrick said, “just winging it”.

    I didn’t notice Stiglitz actually proposing any alternative…

    Re Steve’s “limiting factors”:

    1. These corporate “tangible assets” have been grossly inflated by the boom. (See 2). There’s a LOOONG way to fall before a sufficient devaluation of capital to actually sustain restructured (non-boom) investment.

    2. Houses cheaper than cost of replacing them is stark evidence of underlying overproduction of housing – invisible only to people who reject the concept of overproduction out of faith.

    What would it take for Steve to notice overproduction? Dismantling houses for scrap raw materials?

    Mini housing boom under those circumstances can only be evidence of how absurd the distortions have become and point to far deeper crisis necessary to actually resolve them.

    3. Steve’s confidence in Chinese capitalism to save the day is touching. Meanwhile the Chinese capitalists are getting rather apprehensive about the Chinese proletariat…

    re Wells Fargo as a “retail bank” less affected than the others:

    One area that is very profitable to Wells, however, is asset-based lending: lending to large companies using assets as collateral that are not normally used in other loans. This can be compared to subprime lending, but on a corporate level. The main brand name for this activity is “Wells Fargo Foothill,” and is regularly marketed in tombstone ads in the Wall Street Journal. Wells Fargo also owns Eastdil Secured, which is described as a “real estate investment bank” but is essentially one of the largest commercial real estate brokers for very large transactions (such as the purchase and sale of large Class-A office buildings in central business districts throughout the United States).

    With 25 billion in TARP rescue funds and a AAA rating as the “safest bank” I would guess that tells us something about the likelihoods of forthcoming Tsunami in corporate “sub-prime” bonds and commercial office buildings. Until it actually happens the ratings remain AAA for “tangible assets” like bonds for GM production lines and big empty office buildings.

    It isn’t fun just being spectators, but there’s a certain satisfaction in realizing that all the “analysis” is being done by people just as well informed as Steve…

  100. 100 Arthur

    On a cheerier note, I couldn’t help laughing at this gem from Hilferding (linked above):

    In the preface to the first volume of Capital, Marx, with his well-known “social optimism,” presupposes “a reader who is willing to learn something new, and therefore to think for himself”– this being I believe the only unwarranted presupposition Marx ever made.

  101. 101 Bill Kerr

    agree that Post Autistic is just pluralism, see the featured docs on their home page

    it’s curious that their sidebar features no less than six quotes from Nobel prize winning economists all having a dig at the mainstream – given that winning the Nobel prize puts you into the mainstream if you weren’t already there

    what is really going on in economic departments around the world?

    wrt to Marxism being scientific, one way to think about that is to compare it with Darwin being scientific, which is a much less controversial but still deeply controversial proposition (eg. the Dawkins – SJ Gould arguments)

    Why? My input:

    – mud, the sheer complexity of economics
    – that it is political economy and politics is more mixed with self interest than biology
    – some negative experiences in the Soviet Union and China, part perception, part reality
    – lack of visible public marxist experts, where is the equivalent of Richard Dawkins?
    – lack of a clear ongoing historical thread of polemics with rival schools that also claim in various ways to be scientific (neoclassical, austrian)

    You can be a Darwinist today without reading original Darwin (one interesting thing about Veblen is that he explores this evolutionary perspective: Why is economics not an evolutionary science )

  102. 102 Steve Owens

    Arthur I would notice an overproduction in housing if houses were being built but not sold.(It wasnt that long ago that I had to argue against people at this site that the “shortage” of houses was a Greens conspiracy to lock up land)
    What we have seen is a peculiar US situation where people are better off walking away from houses when the debt becomes greater than the house valuation but this crisis is not really about sub prime, sub prime was just the tipping point.
    I understand that you see the debt crisis as a mask for underlying overproduction and I admire your faith its just that I need hard evidence before I change an oppinion.

  103. 103 Bill Kerr

    Something for those who argue that WW2 and not the New Deal was the main reason for emergence from the Great Depression

    I would agree with anyone who argues that Keynesianism is perverse but cannot refute the beaut graphs and analysis from Charles McMillion: The “FDR failed” myth

    At such a moment, it is imperative to expose a dangerous popular myth regarding the efficacy of President Roosevelt’s actions: that it was not the programs of the New Deal, but only the placing of the nation on a wartime footing years later, that restored the health of the nation’s economy

    Although this solution is far from ideal (high unemployment dragging on for years) it might be one that most people are prepared to tolerate

    This marvellous sardonic Keynes quote from Paul Krugman (Time for bottles in coal mines ) indicates just how perverse it might become:

    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.

  104. 104 Bill Kerr
  105. 105 Steve Owens

    Bill that FDR myth stuff is excellent, I have been influenced by all the right wing US stuff that I watch that FDR had at best been ineffective. It cuts against the myth from both the right and the left that it was the war that ended the Great Depression.
    I might be a humorless person but I cant see any funny side of some geriatric touching up a farm animal still different jokes for different folks.

  106. 106 Steve Owens

    Some people have said that this stock market crash is similar to the crash of 1929.
    Its worth noting that 8 months after October 1929 the stock market index stood at 20% of its 1929 peak
    We are now 7 months post the 2008 crash and the Dow Jones index sits (my rough calculation) at a little over 60% of its 2008 peak.

  107. 107 Arthur

    Steve’s inability to grasp the concept that when large numbers of houses are “sold” to people who cannot afford to pay for them and who end up having to walk away from their mortgages, that reflects an overproduction of houses that have not in fact been successfully sold to final buyers but the lack of effective demand for which has been masked by credit despite their actually remainining unsold is both bizarre and illuminating.

    It sheds light on both the inevitability of crisis of overproduction and the incapacity of bourgeois ideologists to come to grips with it.

    It would be worthwhile trying to spell it out in terms that even Steve could no longer deny or evade by changing the subject, since it is in fact obscure to far more people than Steve, despite being so bloody obvious.

    I don’t have the patience, but (sincerely) encourage others to tackle that worthwhile task.

  108. 108 Steve Owens

    It seems that the housing crisis was not caused by the overproduction of houses but by a speculative bubble in house prices.
    Was the Tulip bubble the result of overproduction of Tuplips? Was the South Seas bubble caused by the overproduction of Sea?
    Again I point that people at this site were arguing last year that there was a shortage of houses, now its overproduction of houses.
    At best we are reduced to a chicken and egg argument. There is currently an oversupply of houses in America either due to producers oversupplying or to a collapse in peoples ability to finance their purchases. For at least 5 years people have been warning that USA house prices were overheated. I can’t recall anyone pointing out that there was a case of over production in houses. Arthur can prove me wrong by producing something he wrote stating that there was overproduction in housing.

  109. 109 Steve Owens

    I will try to be clearer. If banks lend money to people that can’t pay it back then what is happening is fraud at some level.
    We had it here in South Australia. Our State Bank which was gauanteed by the Government started to grant salespeople bonus’s on the basis of the volume of loans that they made without regard to peoples ability to repay. Quite bizzar loans were made by salespeople just offering their contacts money.
    Well the inevidable happened people couldnt repay, lots of what they bought became “overproduced” the Bank went bust and the Government had to pick up the bill.
    A similar thing seems to have happened in America. Banks have made lots of bad loans and what people spent the money on is now “overproduced”.
    Capitalism is a system of producing surplus value and scams I think this time we have seen a scam.

  110. 110 Bill Kerr

    Going back to work in a few days and so will have to start winding back on intensive study at least a little. But this thread has been very valuable for me, thanks to arthur and steve in particular for copious honest and open discussion (and pat for F2F)

    I have just become aware of Daniel Hannan’s rather impressive pilloring of Gordon Brown. He’s taking an opposite position to the pro-Keynes one I find perverse but hard to refute. Very worth while listening to just for the pleasure of hearing impressive rhetoric and watching Brown squirm like a fly pinned to the desk by a sadistic youth.


    For me it’s the predawn of a war that hasn’t quite broken out yet. The big knobs are firing off their canons but don’t know quite where to point them. The little people are still trying to figure out what the fuck is going on. Me included.

  111. 111 Steve Owens

    Oh no Bill not back to wage slavery.
    I also have enjoyed the discussion.
    What I have gleened is
    Overproduction as an explanation seems only useful after the fact.
    The tendancy for the rate of profit to fall cant be measured so seems even less useful than overproduction.
    That Banks will regularly go belly up.
    That the system can let industries go to the wall but not the banks.
    That the Great Depression was greatly exaserbated by poor policy choices.
    Issac Newton wrote words to the effect that he could understand the laws of nature but not comprehend the madness of men. (he had just lost 20,000 pound on the South Sea Bubble) Newton is reputed to be smarter than Einstein.

  112. 112 patrickm

    Steve said: ‘I can’t recall anyone pointing out that there was a case of over production in houses.’

    I have written the following to help me clarify my current understanding and would be very happy to have any errors pointed out to me.

    As I understand it once you abandon ‘mark to market’ accounting standards then banks self interest processes tend to work to ensure that the banks are only ever illiquid rather than insolvent. Banks are thereafter protected from insolvency because they can effectively choose what they think the assets ought to be worth, and sure enough the ‘correct’ valuation will always be found by the CEO and Board of Directors disputing any inadequate result, and once more employing ‘the best and brightest staff’ until the valuations are suitable to be signed off on by the board.

    This is dangerous territory if you ask me, as the whole range of corporation law designed (by the bourgeois ruling elites) to prevent corporations trading while insolvent could then become a tightrope act over a mine field for those involved. With no objective test the subjective must be resorted to.

    When there is no effective market in types of assets they end up being put in a holding pattern like airplanes waiting to land and a valuation assigned to them as if they have landed safely. For example there is no market for the derivatives that are bundles of individual mortgages classes as sub prime. But I doubt that there is much of a market for those formally considered prime either because many people through unemployment, or underemployment are losing their ability to service the prime loan that they had taken out while the boom was on.

    The bundles are real though and some bank or another has those ‘toxic assets’ right now.

    From what I can gather they want the various governments to take them off their hands at a price, and how is that price to be worked out? Let’s take a fictional $100,000,000 bundle of sub prime from a rundown area near an old GM factory in Detroit. When first written in late 2005 the bundle was say made up of average house prices for the area running at say $300,000, thus for ease of calculation $250,000 loans for a total of 400 loans that actually constitute the toxic bundle. The assets have since fallen by 50% with whole neighborhoods in disarray as the factory has shut down or gone over to half time work and foreclosures have proceeded during 2008.

    But it’s much worse than that!

    Houses that have had the ownership completely restored to the bank and the nominal owner evicted have been utterly trashed and the local council has then ordered their demolition! All that is left of the former asset then is the land in a suburb where not many want to buy and the bank has had to carry the added expense of the demolition as a holding cost. Even the price on the raw land can not be said to have bottomed at this stage as this model of housing for this area has just failed for the foreseeable future and that’s what the land was set up to do.

    This process has been so wide spread that evictions are loathed and authorities are doing all that they can to prevent them. Frankly, working class mortgages are not functioning in these areas and a full blown crises has, IMV clearly arisen.

    The banks are often now glad to see a respectable squatter ‘family’ take up residence but that must be undermining the system even further in the long term. On TV I saw a police chief in Miami (I think) explaining why he had no intention of taking any action against respectable squatters, and a family that had been evicted moved straight back in rather than see the house trashed by the ubiquitous vandals while they went homeless, and at that point I thought ‘this is pretty interesting’.

    As a side issue there are interesting parallels here to the evictions in Ireland of tenant farmers of a bygone era who then had their ‘cottages’ (more like hovels really) vandalized by the bailiffs and torched to prevent re-occupancy. When the wealthy landlords homes were torched in return by those prepared to fight a new era began to unfold and that’s what seems to be happening here. People will still leave the hovels behind and move to the urban centers but being driven out and made destitute and homeless produces people who are prepared to fight back.

    Location, location, location has always been the three guiding principles of real estate ‘investment’ with development investors always advised to buy the worse house in the best street. So there are suburb issues always involved and always a market of some sort to consider. Nobody can complain if a speculator has ‘bought’ a $1,000,000 property with $200,000 of their own money and now can’t pay the mortgage. If it goes to auction and fetches only $750,000 the Bank will take the $50,000+ expenses loss rather than cop the further holding costs and suffer the opportunity costs when this real estate market has no up side insight.

    But what we are dealing with in ‘working class’ suburbs is thousands upon thousand of essentially identical houses and the issue is once more a live one as ownership becomes a fetter and a trap.

    Another issue is the provision of workers pensions rather than any pretense that superannuation and building ones wealth in a managed portfolio of share and bond ‘ownership’ somehow changes the relationship of workers to the means of production.

    The issue once the assets are valued ‘correctly’ is not what the balance sheet looks like because that remains soundly in the black. The issue is one of liquidity. How is the bank to remain liquid in this recession? The question is only one of current income against current expenditure. Presumably, during this crisis period, with the government steadily picking up any shortfall that arises – rather than allowing a run to start on any bank and the system imploding from that direction.

    But here is where it gets a little tricky. How does that process normally function? Well the bank makes a profit from lending etc., that’s how! Then the profit after paying tax is distributed as dividends and or retained to add to capital.

    Perhaps proletarians cannot save capitalists; perhaps they cannot save capitalism!

    The bank does not make any profit from lending to borrowers who are in default. Corporation laws ensure that banks can’t carry non performing loans very long (whatever that means exactly). Thus they (eventually) go through the unpleasant task of foreclosure on the assets that were nominally owned by these customers. Through foreclosure the banks either recover their loan (and the expenses involved) or cop a loss in the process.

    Once they cop the loss it is accounted for! Thus real market prices to mark to are re-established daily but are currently being ignored in the balance sheets (after the G20) because it does not suit the banks’ board or apparently those in power to do so as the banks would then be insolvent. Then they would be foreclosed on as well!

    If the bank staff are acting prudently and ‘marking to market’ the assets where a market is actually still functioning the urgent problem of insolvency of the banks re-emerge. If they do not then they are flouting accounting standards that others are being held to and that is unsustainable in a democratic system!

  113. 113 Arthur

    Some quick notes:

    1. There is an ongoing unresolved financial crisis so extreme that that the major banks are actually bankrupt. Extraordinary monetary and fiscal measures are being taken to prevent an actual meltdown that would freeze up everything. But no clear policy has yet been reached as to medium term resolution of the vast gap between the liabilities of financial institutions to their creditors and what they can actually expect to recover from their debtors.

    2. Meanwhile various emergency measures are being taken to allow banks to continue trading while insolvent, such as weakening the “mark to market” rules and pouring in large amounts of emergency “bailout” funds. This is well understood to only make things worse in the medium term but does provide more time for working out what to do.

    3. The underlying financial problem is an overextension of credit beyond that actually required by the process of expanded reproduction. And this t has been going on for decades now in order to keep extending expanded reproduction beyond the point at which it would otherwise have long ago reached a crisis with massive devaluation of capital, before resuming another growth phase.

    4. Such credit expansion always results in “bubbles” and the bubbles always enable “scams”. It isn’t “chicken and egg”. The credit expansion leads to the bubbles which lead to the scams. However there is a positive feedback loop in which the scams end up actively being encouraged (eg weakening “mark to market” and deliberately encouraging insolvent trading) to sustain more credit expansion which enables the bubble to remain inflated instead of collapsing (until it becomes like trying to keep a balloon that has a hole in it inflated by blowing harder). Superficial analysis mistakes this for the cause. People really deeply believe that money grows on trees at a certain rate of interest, even when this requires them to believe that the value of houses is bound to keep on rising, and likewise the value of shares etc. In extreme cases, they will believe it about tulips or ostriches. It isn’t the beliefs, or the manipulators of those beliefs in scams, that cause either the bubble or its collapse. It’s the underlying reality of a social system that is organized around making money grow without any clear understanding of the actual mechanism by which it grows (extracting surplus value from labor).

    5. The underlying real problem is the over-accumulation of capital. This is surplus value that has no adequate outlet in real accumulation and can only be realized by credit expansion. Banks would be happy to lend to “sound” borrowers if they were available. They resort to riskier loans BECAUSE there is an over-accumulation of funds available for loan, compared with outlets for sound investment. This doesn’t just apply to housing but also to corporate finance generally eg where GM was able to float bonds to build production lines now standing unused.

    6. There is no mechanism to resolve such over-accumulation and overproduction other than crisis which devalues existing capitals.

    7. The contradictions of capitalism become extremely visible at times of crisis with people having to do without because the productive forces are so powerful it is easy to produce their needs.

    8. Patrick has described how that is becoming acutely visible in the USA at the moment with people being driven out of and reoccupying their homes. That is likely to end up in a standoff in which homes get rented at much lower rents across the board. This implies wiping off a large part of the capital value ascribed to real estate. That includes a large part of super funds and other savings etc.

    9. Similar phenomena will emerge with mass shutdowns of production capacity so that workers are unemployed while the means of production stand idle. Those means of production then get devalued while being liquidated and sold to new owners in bankruptcies in an enormous concentration of ownership and/or scrapped and replaced with new equipment that is profitable at a lower rate of profit (and higher organic composition of capital). There will be similar spontaneous efforts to reoccupy the plants and keep them producing, but that ultimately requires taking over the whole society and is less likely to evolve a standoff like housing. (Even the housing standoff only intensifies the overall crisis by jamming up the mechanism by which construction is financed).

    10. Its an oversimplification to say that banks make money by lending money and paying the profits of that to their shareholders as dividends. Banking capital is a relatively small part of the total capital. Banks make money as intermediaries between capitalists lending money as part of their portfolios and capitalist enterprises borrowing money for actual production. Liquidating the bankrupt banking capital is in itself no big deal. The vast gulf is between what capitalists as a whole think they owe each other and what they actually have. The problem is how to liquidate that, and not having functioning banks as intermediaries would only make it even more difficult.

  114. 114 Steve Owens

    Arthur I agree with alot that you say and Marxism is a plausable explaination for the business cycle but does it explain the trend? Ok the cycle has growth-boom-bust-stagnation in a rotating pattern but the trend of GDP is higher than it was with every suceeding cycle.
    Not even the great depression could buck the trend.
    GDP is not just some abstract concept I know that as a working person that my life has been richer than my parents whose lives were richer than their parents whose lives were richer than their parents who were buried in paupers graves.

  115. 115 Arthur

    Yes, Marxism does explain that trend (a point especially emphasized here in contrast to those who pretend living standards are pushed down by capitalism and especially that the third world would be better off without it).

    The explanation is simply that capitalism is, with all its uneven and contradictory development, nevertheless a system of development – and far more rapid development than its predecessors. That’s always been explicit in Marxism from the communist manifesto on, even though the accompanying denunciations of capitalism have provided ammunition for people whose reactionary instincts lead them to read Marxist words as though they were calls to retreat from capitalism instead of advance from it.

    Liberating the productive forces from capitalism would result in unleashing science and technology R&D as the most important sectors of the economy with a wave of “creative destruction” unimaginable in comparison with the snails pace achieved by capitalism at its best (ie during booms). It would also sweep aside all backwardness and modernize the third world far more rapidly than imperialism, ending the absurdity of most of humanity still living in the past.

    But that’s comparing the present with the future, while ruling class ideology can only complacently compare itself with the present or past and reactionary ideology such as the greens actually want to go backwards.

  116. 116 Bill Kerr

    Interesting video clip showing Peter Schiff arguing two or three years ago (it’s a series of clips) that we were heading for a crisis. It’s great the way he sticks to his guns while being rubbished and laughed at by 5 or 6 other “expert financial advisers” = voodoo doctors

    http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw

  117. 117 Steve Owens

    Bill yeah great clip, Schiff is very accurate about the crash here’s hoping that he’s not that accurate about the coming depression as he’s been advising people to take a survivalist stance like head to the hills and stock up on beans and ammo. Schiff is from the Austrian school, was Ron Paul’s economic advisor in his presidential race. Clearly a guy to at least listen to.

    Another guy that Ive just come accross whose worth a look is DonHarrold.net

  118. 118 Bill Kerr

    Note in the Schiff clip he says at the start:

    “The basic problem with the US economy is that there is too much consumption and borrowing and not enough production and saving

    The consumer will stop consuming and start saving especially when he sees his home equity begin to evaporate

    When you have the economy at 70% consumption you can’t address those imbalances without a recession. The recession should be embraced and not resisted”

    Schiff looks good in this video partly because the “financial advisers” (idiots) that rubbished and laughed at him are so horribly and appallingly bad

    Here’s my categorisation of the different approaches:

    Stimulus / Keynesian = I’m on a downer bro, give us another shot
    Austrian = austere, we have sinned with too much consumption and debt, now we have to take our medicine even if it tastes bad – at least this one is capable of making good future predictions but they are gloomy

    In this light the Marxist analysis is the only one suggesting a “bright future”

  119. 119 Arthur

    A mass of detailed information and analysis is available in two new April 2009 reports from IMF.

    Not finished reading yet but strikes me as fairly panic stricken (eg calls for printing money).

  120. 120 Steve Owens

    Bill advocating a bright future just doesnt cut it. My Austrian friend says that Austrians will never be in a position to have their ideas dominate, their only hope is to exert some influence. Whereas Marxists have been in charge of state power. Lenin started with worker self management, then one man management and finally settled for Capitalist restoration. Stalin took over and developed a system that balanced wild optimism and slavery through a system of gulag slaves. In 1946 Arther’s hero oversaw hyper inflation. I know you dont want and probably cant accept the fact that Mao was a failure in economuc development. So much effort for so little gain only to see Capitalist restoration that lifted millions out of poverty.

    Completly off topic “No one really listens to anyone else, and if you try it for a while you’ll see why.” Mignion McLaughlin
    We have the advantage of learning from history and history screams that Marxists in charge are a disaster.

  121. 121 Barry

    I think Steve’s statement that “We have the advantage of learning from history and history screams that Marxists in charge are a disaster” is an excellent example of pseudo-leftism. Steve has presented at this site as a leftist yet the above statement is just mainstream conservative and I would say reactionary stuff that is commonplace nearly everywhere. I wish I’d had a dollar for every time I heard B. A. Santamaria make the same point back in the 1970s on his ten minute television slot that used to be aired on Sunday mornings before the wrestling.

    Steve acts as though there is no debate to be had about whether the failure of the revolutions has been a product of the failure of Marxism or more to do with its undermining and rejection by those in power. There are, of course, also material and historical issues in this and I think Dave Mc deals with them in a thought-provoking and convincing (to me) way in his book ‘Bright Future’.

    There has been some impressive stuff in this thread that actually seeks to understand what is happening with the economic crisis through investigating and analysing it – and debating with contrary views. Just when it’s getting good, Steve hops in to attack Stalin.

    By the way, am I the only one to detect a developing warmth toward the Chinese form of capitalism-without-democracy on the part of the pseudos?

  122. 122 Arthur


    Yes, its quite striking how easily the mainstream conservatism emerges when you scratch the surface of pseudo “leftist” anticommunist posturing. Incidentally Steve’s reference above to Varga as “arthur’s hero” is characteristic. It follows immediately after switching from hysteria about Varga allegedly being purged for (correctly as I pointed out) disagreeing with the prevailing Stalinist expectations of a depression following WWII to equally hysterical support for purging Varga as a Stalinist when I reminded Steve that Varga was notoriously a Stalinist and consistency as a pseudo would therefore require Steve to denounce him. Result instant attempt at being consistently pseudo! (Doomed of course since it is inherent in being pseudo that one can only swing between absurd inconsistencies).

    Re China. Yes I have been independently struck by the same phenomena of enthusiasm for the Chinese model now that it is safely capitalist and anti-democratic. Not just the pseudos. Keeps coming up from liberal Democrats etc.

    However, let’s keep to analysis of the crisis here and not get sucked into Steve’s obvious attempt to divert to his favourite diversion.

  123. 123 Steve Owens

    It was sloppy to refer to Varga as Arthurs hero rather than just to point out that an economist that Arthur had praised as being worth studying was the same economist that had been advising the Hungarian government when it set a world record for hyperinflation.
    As to China my only point is that when it was ruled by Marxists its GDP per capita was stagnant while when Capitalist principles were applied it experienced significant growth. I have no illusions about the vicious nature of the Chinese Communist Party prior or post restoration of Capitalism. My heros are people who stood up to all dictators be their names Mao or Deng.

  124. 124 Bill Kerr

    Steve, you have been inconsistent about the Austrian school viewpoint. Earlier on you dismissed them out of hand as anti working class, police state because of their anti union attitudes.

    Now that the Peter Schiff video demonstrates that the Austrian school at least had good predictive powers then you see them in a more favourable light, although you are not giving them full endorsement

    One point here is that if we are stuck with capitalism then we are stuck with the anti union attitudes of the Austrian school as part of the most efficient way to run the economy. Maggie Thatcher carried Hayek’s book and once thumped it on the table at a cabinet meeting – “this is who we follow” – in between crushing the miners and advising Solidarity

    I’d like to see more analysis of the Austrian school fundamentals, going back to their marginal theory of value critique of Marx.

    Nevertheless, the study of the fundamentals does show that Marx is the only logical or consistent way out of capitalism. You can’t point to another one I believe because it doesn’t exist.

    This is the point of having an ideology, as a filter rather than a blinker. It does allow to abstract enough to see the big picture. Without that we won’t transcend a you tube ratings view of history or a parsing of the world according to labels be they mao, stalin, denialist, catastrophist or pseudo

  125. 125 Steve Owens

    Bill my position on the Austrians is not inconsistent. I have always thought that their anti Fed reserve, pro gold standard minimalist role of government (except law and order) views to be reactionary.
    I had seen Peter Schiff on the TV and didnt know that he was an Austrian when I asked you to post a link to his U tube video. Once I realised he was an Austrian I looked up more info about him which suggest that he is also into survivalist stuff on the basis that “our” cities will become no go areas. I havent seen him say this stuff so it might be an exaggeration.
    I think that there are plenty of mainstream economists who were ringing the bell about the US housing market as I mentioned in private communication I got tired of waiting for the US housing crash because people kept warning but it never seemed to come. Well it’s come now.
    I agree with you about the need for ideology but Im not operating at a very deep theroetical level and try to restrict my self to asking questions rather than offering answers.
    As to Marx I think he’s an interesting thinker but Im not opening books written in the 19 Century to understand the problems of the 21st.

  126. 126 Steve Owens

    Bill, People who predicted a US housing collapse and arnt Austrians (as far as I know) include Bill Fleckenstien who stated that the US housing market was a giant ATM in 2004, Robert Schiller Yale proffesor has been warning about a housing crash and recession for years. Jim Rogers said in March 2007 that the housing crash would be a huge mess. You may wish to go to the Last Superpower archives to see that in early 2007 I was arguing that high prices of houses in the US were the result of cheap accessable credit.(other last superpower contributors were arguing that it was a Green conspiracy)
    Spare a thought for Rich Karlgaard who wrote in Forbes Magazine 2007 that the predictions of the Great American Housing collapse was the dog that didnt bark.
    George Soros (who Ive seen described as a Keynsian) also predicted the Economic collapse although he modestly states that he had predicted it twice before and it didnt happen.

  127. 127 Steve Owens

    OK Bill Ive found what Ive been looking for the first economist to point out that the US had a housing bubble was Dean Baker who pointed it out in 2002.

  128. 128 Steve Owens

    Bill, One reason that the gold standard is fraudulent is that No country has ever been on a gold standard. What governments have done is to promise gold convertbility. So you can see that when people say gold standard what they really mean is gold promise.
    This has problems one being that governments break promises all the time plus speculators know this and start to bet that a government will and pressure them to break this promise.

  129. 129 Steve Owens

    Just on the question of logical argument
    If I point out that a human rights group has stated that the court system under the present government is as bad as the one under the old government its just a statement of fact no inference can be drawn that I support the old government (unless you just want to distort my position) BTW I see that the new government has introduced mass executions saves time I guess.
    Also if I point out that the introduction of Capitalist principles into China have lead to an expansion of that economy, its just a statement of fact, no inference can be drawn that I’m a secret supporter of that heinous regimen.
    OK Ive made my point, I didn’t think that I would have to make such a basic point but apparently I do.
    Just another loose point. I stated that the stock market had been oversold. Arthur objected but my opinion was based on facts such as companies being sold below the value that they held in the bank. Let me provide one example. Cooper Petroleum ASX code COE had no debt over $90million in the bank and an oil field producing 1500 barrels per day. At the height of the panic this company along with others were being sold at a price below that of their bank balances. That’s why I would describe the market as oversold.

  130. 130 Arthur


    My (tentative) take on the Austrian or “psychological” school is roughly that the non-idealist parts of the Marginalism were successfully imported into the neoclassical synthesis via opportunity costs so it translates into a more classical (marginal) cost of production theory of value.

    The rational parts of this would be along the lines Marx would have had to get into if he had actually delivered the missing further volumes on the surface phenomena of competition etc. (He got stuck studying calculus, which he understood to be necessary for producing a coherent theory on these aspects and desirable for clarifying the other stuff – see his mathematical manuscripts).

    Geneeral equilibrium theory is in some ways closer to Marx’s more “biological” dialectical perspective of interacting causes and effects than was the the more mechanistic classical (eg Ricardian) economics that Marx was critiquing. However it rests on the purely ideological conception of capitalism as in (sometimes dynamic) equilibrium whereas both Marx and the Austrians understood it better as system of dynamic (and sometimes chaotic and catastrophic) disequilibrium (though the Austrians blame the catastrophes on “government” instead of on the absurdity of highly socialized production with private appropriation).

    More modern developments of the theory of competition and surface phenomena in the period of monopoly capitalism and imperialism make use of techniques from games theory just as the neo-Darwinian synthesis makes use of concepts of evolutionarily stable strategy. This tends to be less heavily ideological than the “vulgar economics” stuff taught to undergraduates and simply takes it for granted that that it is about how to be a successful predator.

    Mainstream economics is far more useful for actual business and economic management than Marxist political economy but is naturally not interested in exploring the underlying laws affecting the long run historical evolution and transitory nature of capitalism. There is some useful stuff on business cycles but the ideological “equilibrium” blinkers make it difficult for them to develop a coherent theory of crisis.

    For the underlying laws, including those that result in periodic crises, one has to start from Marx.

    Unfortunately there hasn’t been much achieved in the way of developing Marxist political economy further since Marx and Engels.

    We need to critically absorb the scientific parts of mainstream economics (including marginalism) in developing a full theory of competition and surface phenomena including those that become visible in crisis and applying it to the concrete analysis of concrete conditions in the world today.

    Fortunately another task in economic theory, developing concepts applicable to a post-capitalist economic system have been rather fully developed in mainstream “welfare economics” so that can to some extent be left aside. (There’s a saying that bourgeois economists study the economics of socialism while Marxists study the economics of capitalism). I suspect though that clarifying how economic issues would be dealt with after capitalism is also relevant to properly understanding the difference in how they are dealt with under capitalism and what is actually involved in a transition from capitalism.

    [Ignoring any remarks relevant to the topic of this thread that may have been included in Steve’s recent posts as it simply isn’t worth the trouble of disentangling them from the flurry of pure spam and he is no longer bothering to pretend interest in furthering discussion of important issues but only in quite juvenile and dishonest point scoring about whatever floats into his consciousness from moment to moment].

  131. 131 Bill Kerr

    Thanks for thoughts on austrian school arthur, noted for when I have a bit more time

    I was also thinking about the point you make about the language of economics. As I study this I do get the feeling that different schools of thought use different vocabularies – one for day to day speculation, one for neoclassical, one for austrian, one for marxist – and that quite often one school does not even know the language of another school.

    eg. the day to day speculators responded to austrian Peter Schiff as though his thoughts were quite alien, they were incredulous. They didn’t respond as though they were familiar with his position and ready to argue against it. This contrast contributed to the positive impact of Schiffs (in retrospect) correct predictions, it made him appear to have almost magic powers. (in contrast to just looking at his words on their own)

    This economic language issue might create quite a block for those trying to come to grips with it all. There are several lamp posts, not just one, for the drunk to look for his keys under.

  132. 132 Steve Owens


    Peter Schiff looks good against those other media commentators partly because a lot of those media performers are nothing more than sprukers for the market. The “business” programs are entertainment they are not serious.
    Schiff looks good because he’s just saying quite reasonable stuff when everyone else on the program is caught up in the euphoria of record stock prices. In the program “Mad Money” the host recommends investing in Bear Sterns only days before it goes down. I’m sure most people have caught this by now as its become quite famous.
    Interestingly Schiff’s predictions about the US dollar have not come to pass.
    I am still a bit mystified as to your interest in the Austrians. Even if they produced the most efficient model of Capitalism they would still remain beyond the pale. Economic efficiency was the argument used by the English not to give famine relief during the potato famine (ie stop the Irish developing welfare passivity)
    I still retain enough of my Marxism to believe in class struggle and the Austrians clearly see the state as standing above class (with Thatcherite results) Lots of anti worker politicians admired brave Solidarity. I supported Solidarity because I believe that workers have a universal right to organise for their betterment. The Austrians are against workers taking action to support their interests. As I have pointed out before to support the Austrians means supporting the Combination Laws.

  133. 133 Steve Owens

    Peter Schiff makes some other interesting predictions. In early 2008 he predicted that oil would hit $200 and that gold would hit $1200 both by the end of 2008 and both wrong. More interestingly is his prediction about the US$ which he thinks will collapse. I think that long term the US$ will decline but not collapse in the short term. This is due to 2 reasons one is that we are in a synchronised recession and currencies are traded on a relative basis. For a currency to collapse its home economy would have to tank relative to other economies. The second reason is that even though the return on US long term bonds is 0% people are still buying them as the US$ is still seen as a “safe haven” currency.

  134. 134 Arthur

    “Long term” (10 year) US bonds currently have a yield close to 3%, not 0%.

    UK recently had a failed auction for their securities – not enough “buyers”.

    The IMF expects (and advocates) short term central bank rates at or near 0% for years plus “quantiative easing” ie the the central bank will “print money” to buy them fom the treasury when nobody else will.

    This is uncharted territory which makes their models for predicting recovery completely unreliable.

    US dollar has been appreciating against other currencies in this situation because its the entire world system that is severely out of kilter, not just the US, and the US financial markets are the largest and therefore most liquid so money gets parked there when there is nothing else to do with it.

    I still haven’t finished reading the IMF reports (which are essential). But so far it strongly reinforces my impression that they are currently firefighting an ongoing raging financial crisis that could still meltdown. The methods they are using are dramatically heavier doses of the same Keynesian “stimulus” that eventually led to the present situation, but at zero short term interest rates they appear to be running out of steam.

    Recovery, and measures for stimulating recovery cannot actually begin until after the crisis is over, but that doesn’t seem to be the general perception. Public discussion still seems to be at the level of outrage about saving the banks and arguments about how best to stimulate the real economy, ignoring the fact that the banks are still not functioning so the crisis phase is not yet over.

  135. 135 Steve Owens

    Latest rate on 30year US treasury bond = 3.51%
    Average US inflation rate 2008 = 3.85%
    Nominal rate is 3.51 but the real rate is slightly below 0 I took the liberty of rounding off.
    If you notice I did not cite the rate but the return.

  136. 136 Arthur

    Deflation has already started in US as well as Japan and China.

    12 month CPI to March 2009 for urban consumers fell by -0.4% DESPITE printing money.

    (Mainly due to energy costs falling).

    Much worse in Japan and China.

  137. 137 Steve Owens

    I know I shouldn’t but I’m enjoying this crisis immensely (obviously I still have a job)
    The Austrians say that the deflation will turn into hyperinflation that will make a 3% return look pretty ordinary.
    I guess any deflation will be temporary just because the authorities don’t want deflation and they can print as much money as they want.
    If we do hit hyperinflation my advise (apart from overthrowing the system) is to borrow and buy something solid real estate or gold as paper money will become worthless but gold and houses should do well.(unless the Communists take over and redistribute everything)
    In all probability if we do get hyperinflation no ones going to lend us money.

  138. 138 Steve Owens

    Just while Arther is away reading those IMF reports (now there’s a job for someone with time on their hands) What I think is essential reading is stuff on the Swedish banking crisis, Japanese banking crisis, IMF intervention in the Asian economic meltdown and the different tack taken during the 2000 US recession. With the proviso that this crisis is of a different order of magnitude than those.
    Just a quick word about deflation. We have an interventionist President, a Fed Chair who is a scholar of the Great Depression, there’s no way those 2 are going to let inflation sit at the low levels that Arthur cited. Now the US never sets inflation targets in public but my best guess is that they will aim for and achieve 3-5% in the near future.
    BTW have you seen who might end up owning GM would you believe 50% Uncle Sam and 40% Auto Workers Union. This might just be a scare scenario for intransigent Bond holders but if it comes about wow socialism in our time, the government owning the banks and GM.

  139. 139 Steve Owens

    Bugga Just when I thought I had it right it now looks like Obama is going to tell GM no deal. I was looking forward to a new socialist car you just dont see enough Trabants on the road or even and much more likely broken down on the side of the road.
    I used to own a motorcycle built in the USSR so I know quality when I see it.

  140. 140 Arthur


    Perhaps others find your continual twittering amusing. No doubt they will say so. In the absence of other feedback, please be aware at least one reader finds it just an irritating nuisance distracting from actual discussion with no apparant purpose other than emphasizing that you don’t have anything worthwhile to say while pretending otherwise to yourself.

  141. 141 Steve Owens

    Arthur Im happy to go to read only mode if you think that will improve the level of discussion

  142. 142 Arthur

    Simply post when you have something relevant to say that you think others might want to think about or respond to and not when you don’t.

  143. 143 Barry

    I have a question.

    I just saw on TV that in a suburban development in California, the developer has demolished the houses as it is cheaper than selling them. http://www.statesman.com/business/content/business/stories/other/05/06/0506guaranty.html

    These houses were designed for the so-called middle class, people on a good wage.

    My question is: how does this fit into the analysis of over-production?

    Please don’t read anything into the question; it’s just that I have a lot to learn in this area and it can help to understand things if specific real-world examples are looked at.

    Housing – having a home – is such a basic need. Yet, on one hand, beautiful new homes being demolished; on the other hand, the majority of people do not own their own home and there is a significant problem of homelessness.

  144. 144 Bill Kerr

    hi barry,

    That is just about a definition of overproduction – production of commodities that can’t be sold in a capitalist marketplace

    I remember stories from the last Depression about food surpluses being destroyed while people went hungry. I gather that capitalism manages things a little better these days with more computerised “just in time” production. The example you cite does make people question the sanity of the system we live in so the more examples like this the better.

    The article you link to says that 4 homes were finished out of a planned 16 home project and that:

    “It just didn’t pencil out for them,” she said. “They’d have to spend a lot of money to turn around and sell the houses. They just made a financial decision to just demolish them.”…

    Construction halted last summer, and the homes became a nuisance, attracting vandals and squatters …

    Patrick pointed out earlier the issue of squatters moving into vacant homes – in some cases the same home they had just been foreclosed on.

    So in part the bank involved is cutting their losses (selling the parts and not hiring security guards) and also preventing those pesky squatters from challenging property rights.

    I suppose General Motors will quietly destroy cars they can’t sell – but it’s harder to conceal in the case of completed houses which are out in public view

  145. 145 Arthur

    Looks like a perfect illustration of the irrationality of capitalist overproduction to me. Should be a focus for mass mobilization.

    Whole shipyards and steel mills were scrapped in the last Depression.

    Most of the required “devaluation of capital” takes the form idle stocks and plant capacity and falling prices. Actual destruction is the extreme form.

    I would have thought it would be cheaper to not demolish them unless that particular bank supplies most of the market for such housing in its area (in which case demonstratively removing excess from the market might help keep other prices from falling as much).

    Perhaps part of the “carrying cost” is rates on the “improved land value” and they can now proudly demonstrate that they are entitled to a rate reduction.

    BTW I’ve found Chapter 9 of Makito Itoh (1987) much closer to my understanding of Marxist theory of crisis than anything else I’ve been reading so far. (Not finished the book yet though).

  146. 146 Bill Kerr


    BTW I’ve found Chapter 9 of Makito Itoh (1987) much closer to my understanding of Marxist theory of crisis than anything else I’ve been reading so far. (Not finished the book yet though)

    reviewed here:

  147. 147 Arthur

    I haven’t read the rest of the book or much else from the “Uno” school but I doubt the review does it justice.

    What I liked about Chapter 9 on crises was that it gave a similar account of wages being determined by accumulation and formation and absorption of reserve army as U&R (contrary to claims of real wages not rising with productivity etc) and rejected the underconsumptionist approach favoured by the reviewers at Monthly Review and the basically incoherent “falling rate of profit” theory.

    It did give the impression of being similar to the “profit squeeze” line as claimed by the review – especially by not clearly developing what I consider to be the “orthodox” account of inevitable disproportionality that results in overaccumulation and realization crisis. But I still found it better than other stuff I’ve been reading and don’t think much of the review.

    BTW I recommend David Harvey’s “Limits to Capital” as useful for anyone reading or re-reading the whole of Capital et al as providing lots of references and quotes (plus references to the 1970s literature) and a guide for the perplexed on the first 3 chapters of capital re value etc. He meets the requirement of trying to think things through independently while actually studying Marx rather than imposing preconceived ideas on Marx. (Aim was to clarify study of urban issues and develop theories of finance capital, state and imperialism). I don’t think its actually successful on crisis theory as it points out that fixed capital investments increase after crisis and explains aspects of Keynesian state policies to support that, but somehow ignores this and claims rising organic composition of capital brings down profit rate causing crisis. The evidence offered actually suggests the opposite – that accumulation at the old more labor intensive composition results in overaccumulation and crisis restructures to allow resumed accumulation at the required higher organic composition.

    Its rather strange and confusing so I don’t recommend it other than for people seriously studying Capital for themselves.

    I’ve only read the two introductory “theory” chapters of Brennan (2006) so far. Not impressed.

    However all 3 are consistent with my view that the crisis has been developing since the 1970s – as opposed to prevailing view that it’s some sort of bolt from the blue (and primarily financial).

  148. 148 Bill Kerr

    There is other material by Makito Itoh on line, eg. this analysis of the 1990s economic downturn in Japan

    I’ve only read the two introductory “theory” chapters of Brennan (2006) so far. Not impressed.

    This book was initially published in 1998 but then a long Afterword added (80 pages) and republished in 2006. I started reading the Afterword and have found it useful because it supplies lots of data and detail that is not present in “Unemployment and Revolution”. (need both)

    However all 3 are consistent with my view that the crisis has been developing since the 1970s – as opposed to prevailing view that it’s some sort of bolt from the blue (and primarily financial)

    Given the recent talk of “cautious optimism” (unemployment in Australia has stopped increasing; half the US Banks passed the (dubious) stress tests; some banks want to pay their government money back eg. Goldman Sachs, too boost their credibility; “green shoots” talk) it might be worthwhile more accurately assessing the prevailing view.

    My guess is that following Greenspan’s self criticism in October 2008:

    … his hands-off regulatory philosophy had been a mistake. Speaking before a congressional committee for four hours, Greenspan said he had been wrong in thinking that banks would be able to assess risk competently and discipline themselves

    many people would think the crisis is due to greed and that the answer is regulation

    An official “cautious optimism” is what you would expect at this point – but would like to see analysis of dubious nature of the stress tests

    For deeper analysis, the only schools of thought that seem to have any real credibility are Austrian and Marxist and both of those argue that the crisis stems back to the 1970s (and only the Marxist view stresses overproduction as central). In that sense it is not all that difficult to argue that any recovery is bound to be a short term illusion.

    (still short of time but will keep reading Brenner as time permits – just checked Krugman’s blog to see what my favourite Keynesian has to say about the stress tests but not much so far)

  149. 149 Arthur

    PS I just read Makato Itoh on Money and credit in socialist economies. Pretty hopeless.

  150. 150 Arthur


    1. Also read Itoh on Japan bubble followed by many years of depression with near zero interest rates. Was struck by resemblance to descriptions of US bubble and expectations for aftermath. Note that Japan badly hit in current global crisis.

    2. Also started Brenner afterword (first ;-). Agree on need for concrete data. IMF reports more current and comprehensive (and include a surprising amount of interesting theory).

    3. I don’t think the spruiking of official optimism to “business” and populace reflects the “prevailing view”. Australia has not been hit much yet but trade and investment dependency means it is likely to be as deep and last as long as elsewhere (just delayed).

    4. Yes, many (most) will think the problem is greed and answer is more regulation. On the one hand that is a step forward from neoliberal complacency and enthusiasm about the wonders of capitalism. It is also a step towards a likely post-crisis aftermath of a much more statist economy with the state as the national (and international) capitalist and individual capitalists holding huge amounts of state debt. That would politicize “the economy” and make subsequent crises revolve around struggle for state power (as described by Engels).

    5. Agree that Austrians are the most interesting non-Marxist school (and more interesting than what passes as “Marxian”).

    6. I don’t think “overproduction” will be controversial. It becomes visibly self-evident with mass layoffs and idle plant. Both Austrians and other schools have no plausible theorization of why and blame some sort of “external shock” instead of the dynamic mechanisms of capitalist accumulation (generally blame is on government policy these days whereas in nineteenth century there was no concept of government being responsible for economic growth). Marxism does have a theorization but its never been widely understood and has been buried for a long time. My focus will be on trying to clarify that.

    7. I agree with Kruger’s cynicism about the stress tests. They are talking about regulating more tightly while trying to cover up the fact that the banks are insolvent while figuring out what to do. There is a very long IMF report on global financial stability with lots of stuff on the interdependency of the big US banks. Haven’t read it yet but the sheer size looked somewhat panic stricken.

  151. 151 Bill Kerr


    I don’t think “overproduction” will be controversial. It becomes visibly self-evident with mass layoffs and idle plant. Both Austrians and other schools have no plausible theorization of why and blame some sort of “external shock” instead of the dynamic mechanisms of capitalist accumulation (generally blame is on government policy these days whereas in nineteenth century there was no concept of government being responsible for economic growth). Marxism does have a theorization but its never been widely understood and has been buried for a long time. My focus will be on trying to clarify that

    Well, a friendly austrian told me that if governments stopped interfering in the economy then capital would flow naturally to the next profitable venture:

    Overproduction in a given sector of an actual free market (which we don’t have) isn’t usually a long term problem as it will drive down prices and make that sector less profitable resulting in investors putting their money somewhere else.

    The big problem is when the signs of overproduction are masked by government monetary policy. Continual monetary expansion devalues the currency and causes prices to rise. Rising prices are also exactly what you see in the case of increased demand. Investors see this and invest in increased productive capacity. And since this is happening by currency manipulation, it occurs across the entire economy so when the eventual bust finally arrives everybody is affected. There is some theoretical and historical indication that in the case where booms and busts occur without the aid of monetary policy (due to investor optimism or an information deficit) they tend to be confined to more narrow industry sectors and tend to have faster recovery times.</

  152. 152 Bill Kerr

    Tim Geithner interviewed by Judy Woodruff
    streaming video, skip the 30 second advert at the start

    starts off apologetic about half a million new unemployed in previous month, long term unemployment is growing, 5.7 million americans have lost jobs since the recession began

    recession that occurs because people have borrowed too much requires a slow, long recovery

    banks stress test was very exacting and tough set of standards (repeated about 6 times during the interview)

    stress tests bring unprecedented level of transparency to bank balance sheets, which helps create confidence in the future

    IMF worse case scenarios worse than the US governments worse case scenarios (Geithner responds to that, says that the Fed numbers are close to IMF estimates)

    bit of a slip here – we did the stress tests so that people would have more confidence in the system!!

    the banks are solvent, there is not a tenable case for nationalisation, nationalisation would end up more expensive and riskier (his tone of voice becomes more assertive and less apologetic here, conveys the feeling that nationalisation is unamerican)

    he rejects criticism that he is too close to Wall Street, he would never do anything that would benefit some piece of the financial system and harm the people, seems hurt that anyone might suggest that

    this is the most aggressive and proactive response to crisis that you have seen in decades

    the previous financial system did a terrible job (oops, wasn’t Geithner part of the Fed as this thing unfolded and before that)

  153. 153 Bill Kerr

    actual US Unemployment: 15.8%

    US unemployment:
    Official figures: 13.7 million and 8.9%

    The above Washington Post figures are:
    22 million and 15.8% (but should be 14.3% )
    The total US workforce is 154 million stated in the article, so their arithmetic is incorrect since 22/154 is 14.3%

    The shortfall in official figures is made up of:
    2.1 million – marginal, including discouraged
    3.6 million – given up
    2.6 million – current part time and want full time, not looking due to illness, disability, transport reasons

    In February the White House predicted unemployment would peak at 8.1% in 2009

  154. 154 Steve Owens

    I dont think that “Unemployment and Revolution” is relevant.
    This is because that I agreed with Arthur in 1981. In U and R Arthur points out that Capitalism is ripe for a crisis and that credit had been fully extended.
    Now Arthur dosn’t claim that credit had been fully extended for no reason. If you can throw your mind back to the 1970’s you will remember petro dollars the flooding of the world with credit.
    If you remember the late 1980’s we had Japan as the world’s greatest supplier of credit. So you can see that 20 or 30 years ago we had great credit bubbles. Now if the USA was ripe for a crisis greater than the great depression why didn’t it happen during the recession of the early 90’s or the crash of 87?
    My point is that I still believe that the Great Depression was an abberation brought on really poor public policy. This current crisis is serious due to the low investment levels in the USA, however China and India are on the path of development and China at least has the savings to fund this development. During the great depression there was no emering economies that were sitting on significant savings levels.
    The USA still has a great per capita GDP, Japan is being underated along the same lines. Im sure that some currency devaluations will come into play and provide leading economies with some needed realignment.
    Have you read Krugman on the Japanese banking crisis?
    In a couple of days the April US inflation figures will be released, I expect them to confirm my expectation that the US is on the way to 3%.
    BTW those houses that were bulldozed. It might indicate overproduction but it might also reflect the facts that the builder defalted on the loan leaving a bankrupt bank with a choice pay a million dollars to complete the project or 100 thousand dollars to level it.

  155. 155 Arthur

    Credit WAS “rather fully extended” in 1970s and even more so now.

    If there HAD been a full scale crisis and devaluation in between, followed by recovery we would now be discussing a subsequent cyclic crisis.

    But it turned out there wasn’t one. There hasn’t been one since the 1930s “aberration” which is a pretty good track record for a system that was long overdue for retirement by then and went through a devastating world war before the subsequent post-war prosperity (and “globalization”) phase.

    Hence the claims that it is part of the same cycle that was discussed in U&R (and widely elsewhere) back in the 1970s.

    There doesn’t seem to be much dispute that there is a crisis now. Disagreements are as to whether it will be deeper than the last Great Depression or merely worse than any of the post WWII recessions.

    I doubt it is possible to predict in principle. In any case I certainly am not in a position to do so.

    What I do claim, and as was claimed in U&R, is that UNTIL there is a crisis at least as deep as the Great Depression, any apparant resolution will NOT be a proper recovery and start of a new cycle but merely a further postponement as a result of the further overextension of credit successfully postponing full resolution (restoration of the proportions necessary for accumulation) once again.

    The essence of not following the “really poor public policy” that resulted in the Great Depression has been massive Keynesian deficits over several decades (especially massive when accompanied by “neoliberal” and “supply side” rhetoric repudiating Keynesianism).

    The fact that it has successfully continued to postpone resolution for so long is contrary to the expecations of both Austrian and Marxist theory.

    The fact that postponement has a resulted in more intractable problems and expectations that an actual full scale crisis would be deeper than ever in order to actually resolve anything is becoming more and more apparant.

    Austrians blame government for doing whatever they can to postpone recurrence of a situation that graphically revealed the intolerable absurdity of capitalism in the 1930s. Their confidence that full scale crises are still acceptable rather than dangerous to capitalist survival has not been shared by many since the consolidation of monopoly capitalism at the start of the last century.

  156. 156 Bill Kerr
  157. 157 Barry

    Another question relating to overproduction. Steve says: “BTW those houses that were bulldozed. It might indicate overproduction but it might also reflect the facts that the builder defalted on the loan leaving a bankrupt bank with a choice pay a million dollars to complete the project or 100 thousand dollars to level it”.

    Why would the builder need to default in the first place? It’s not just an isolated incident, obviously.

  158. 158 Steve Owens

    That’s right it might be over production and it might be explanable in other ways. The argument has been did the surplus of houses cause the crisis or did the crisis cause the surplus of houses.
    In the 1970’s the world had the petro dollar crisis, lots of mid east oil money lent to 3rd world countries like Poland to develop industry. The bust came, the IMF introduced Structural Readjustment Programmes and lots of people died because governments saved money by not spending it on housing and health care. Borrowers payed the loans back and or lenders lost money. Commentators speculated “was this the start of a new depression?”
    In the 80’s Japan was lending money and we saw “leveraged buy outs” Milkien’s “junk bonds” again a credit bubble followed by a recession. Again commentators pulled out the “Were all doomed” template, some money was lost and some people went broke, just another debt bubble.
    The Asian economic melt down was the result of a debt bubble. Again the IMF stepped in with tough love, more poor people went without again, the worry was of a trigger to depression but it didnt happen.
    Now we have overproduction. Overproduction of money. The Chinese and the Norwiegens among others have been lending the US great wads of money. Yes they have created a debt bubble and a price will have to be paid , the US economy will have to restructure (luckily they have a lot of waste in the system that can go) plus they have what other economies didnt have, a currency that is the worlds common currency, thats a big advantage.
    So my point is that you can set your watch by these debt bubbles and so far they get resloved.
    Now this could be a crisis of overproduction of goods but that wasnt obvious before the fact. It might be overproduction of capacity but again that wasnt obvious before the fact. What was obvious was that China was overproducing profits. Now if Chinese savings are the root of the problem then a Social Democratic solution screams out. If all these debt crisis are the result of money that finds its way into bad loans then the system could be saved by taxation and spending unspendable surpluses on socially useful stuff like health and education.
    ps the IMF self critisism over the Asian melt down is worth some attention and the most recent inflation figures from the US dont support my earlier argument but just give it time.

  159. 159 Arthur

    “It wasn’t obvious before the fact”…

    What can one say?

    Yes there has been a succession of bubbles since the 1970s.

    The point is that they have evidently NOT been resolved and CANNOT be resolved by the measures being taken to postpone crisis – which consist essentially of a further expansion of debt leading to more and bigger bubbles.

    All that remains for sustaining faith in crisis free capitalism is the claim that IF the problems were not in the nature of the system itself THEN there could be a Social Democrat “solution” to save the system by spending taxation on “socially useful stuff like health and education”.

    But tax revenue dries up in the absence of profits (and employment etc) so governments will in fact, while expanding their deficits, be cutting back on socially useful stuff.

    If we want production for use rather than for profit it has to be based on expropriation of the means of production rather than taxation of the profits while leaving the existing owners in charge whose only motive for producing is profit.

    Confidence that the CPI will keep rising forever is essentially the same confidence that sustains bubbles. Resolution of the underlying disproportions would involve deflation and massive crisis.

    That confidence is of course unshakeable when nothing is obvious until after the fact. The facts are opposite to expectations but “Just give it time”.

  160. 160 Steve Owens

    “But tax dries up in the absence of profits” My point is that financial bubbles indicate that somewhere in the system profits havent dried up. My point is that financial bubbles occur because someone is sitting on a big pile of profit. Someone has to finance the bubble be they oil shieks, Japanese banks or in our current malaise the Chinese government.
    For example the Chinese government could have chosen to spend their money on social services or they could choose to fund the US real estate boom. Capitalism is not completely mechanical but maybe you think that these people have no choice other than to chase profit.

  161. 161 Arthur

    Overproduction or overaccumulation is NOT a shortage of profits. It is a shortage of opportunities to invest those profits in making more profits.

    Bubbles develop because people are NOT “sitting on a big pile of profit” that they have accumulated. They have no choice but to chase profit so, in the absence of “normal” productive investment opportunities that would generate more profit, they first try investing their big piles of (over)accumulated profit in speculations that depend for profitability on prices going up. As long as prices do go up that makes more sense to them than just “sitting”. The bubble makes it appear as though opportunities for investing profits have not dried up and it only becomes obvious after the fact that the speculative sales made were not in fact meeting effective demand but relied, like a ponzi scheme, on more of the same.

    Only when the bubble bursts, ie prices stop going up, do they THEN resort to just “sitting on” accumulated profits waiting for “better times” to invest them. That “sitting on” is called a depression. It is the opposite of a bubble.

    Those who got out of the boom too late lose. But so do those who got out too early. There’s no way the large majority of capitalists can perfectly balance their portfolios to avoid being swept along with whatever phase the system is actually in rather than what they think it is going to happen. Their collective “confidence” and subsequent “panic” do feed and deepen the underlyingthe movements but they have no control over the underlying movements.

    Certainly they dont have the option of “choosing to spend their money on social services”. That isn’t a way to invest profits, but an incidental cost of maintaining a supply of labor power not different in principle from paying wages in order to obtain labour power. Costs like wages and social services don’t add to their wealth, which is the whole point of investing. They are only paid as a subtraction from their wealth as a result of them being a necessary condition for increasing their wealth.

  162. 162 Steve Owens

    When I studied high school economics the text book pointed out that a long term inbalance of trade was unsustainable. What we have had is a long term inbalance of trade between China and the USA. The authorities in both countries made a choice to let this run its course. Maximisation of profit is a capitalist goal but its not the only factor in decision making. If Capitalism was inflexable and incapable of making choices it would have fallen long ago.
    The Chinese government decided to fund a real estate boom but they could have chosen to modernise their heath system there by buying sophisticated equiptment from the USA They made one choice but it’s not unthinkable that they could have made a better one.
    Currently the US administration is faced with choices like run an inflationary policy or a deflationary policy. Clearly a modest inflationary policy is called for.

  163. 163 Arthur

    The “authorities” do not run the capitalist economy because they do not own the means of production. So they don’t get to make the choices.

    They do manage certain common functions including the monetary system and within limits are able to make choices about that.

    The limits are made clear by the fact that currently all governments are making “choices” to run inflationary monetary policies. Those choices are “called for”, in fact dictated by “the economy”.

    The US has been running a “moderate inflationary policy” for decades. It is now running an EXTREME inflationary policy – not only staggering levels of deficit spending and zero official interest rates but actually PRINTING MONEY “quantiative easing”.

    Nevertheless, there is a hole in the balloon and it isn’t inflating so far. In fact it has actually started deflating DESPITE the extreme inflationary policies.

    That high school text book should have discussed long term balance of payments and flows of investments and returns as well as “balance of trade”. Perhaps its time to look at those nineteenth century volumes which showed in considerable detail why capitalism cannot maintain a long term balance of anything but goes through periodic cyclic crises.

  164. 164 Steve Owens

    The Chinese government does seem to run the system in China.
    I think that you underplay the role that ideas play. The Chinese have for years been holding down the level of their currency so that they could exploit that advantage. The Americans have been immobilized by their ideas like “the trade imbalance didn’t matter as long as Chinese money flowed into the US” and ideas like “intervention is bad, markets are good” plus the Bush admins idea that it could run up huge deficits while advocating that the American consumer could spend their way out of trouble. I think that the current spend our way out of trouble idea is a dangerous substitute for taking measures that would restructure the US economy.

  165. 165 Arthur

    Sure its “dangerous”. But the measures that would actually restructure the world economy ARE the crisis.

    Chinese government may appear to run its economy more than others. But that is somewhat illusory. Actually one reason current deeply hated regime survives is people’s fear that China could literally fall apart into provincial warlordism if it collapses. They have so little economic control on the ground that they have difficulty preventing provinces from setting up customs duties etc against each other! State cadres as well as private capitalists are dominated by chasing profits.

    They probably do have at least as much control over foreign trade, investment and monetary policy as other governments. I don’t have a good enough understanding of how that all works, especially since collapse of gold standard, to form an opinion on their exchange rate policy. Offhand however, being cashed up at the outbreak of crisis and able to buy up cheap foreign investments doesn’t strike me as a particularly stupid policy…

    One thing for sure, it’s a WORLD crisis, not just a US crisis. World trade has plummeted and China is dependent on that.

    Also China becoming a major provider of credit to the world’s greatest debtor country is not only a sign of US decline but also of Chinese overproduction. Producers extending credit to their customers so they can buy is precisely what happens when production exceeds effective demand and enables those disproportions to continue increasing until outbreak of crisis. This would be just as true on world market level as for individual firms.

    After the debtors go bankrupt, the creditors tend to follow and exchange imbalances ricochet from country to country depending on the timing of payments due and liquidations. International reserves are almost insignificant compared to the DAILY flow of more than $3 trillion in foreign exchange transactions (VASTLY exceeding gross national products, let alone trade balances).

  166. 166 Steve Owens

    Ok your argument is that the market forces people’s hands where my argument is that peolpe are presented with a number of choices.
    Enron collapsed in 2001. It had been a big user of derivatives which were shown to be fraudulent.
    Derivatives continued to be popular. My point is that as early as 2001 people had the choice about using financial instruments that had been shown to be a scam.
    The US government activly encouraged the housing bubble but my point is that they didnt have to privatise Fanny and Freddy, they didnt have to stipulate that banks lend to the poor and they didn’t need to turn a blind eye to predatory lending.
    Gordon Brown lifted regulations on the city, to make London the financial capital but he didn’t need to.
    The best example is Iceland, high standard of living big fishing industry , small population. Theres nothing forcing Iceland to turn itself into a giant merchant bank. It was a choice and clearly it was the wrong choice.
    During a bubble lots of people make bad choices but thats what a bubble is lots of bad choices.
    OK so lots of “hot” money was pouring into US real estate but the government does have the regulatory power to curb a bubble they just have to decide to use those powers. Governments can raise interest rates, they can stipulate that borrowers have a larger deposit. Its not that the US government didnt have the power it was that they chose not to use it.
    The heart of this crisis was not the US housing market but the trade imbalance between China and the USA and as I have said before the Chinese government actively promoted this imbalance by currency manipulation and the US government chose to do nothing, maybe they chose to listen to Bernanke who had concluded that the era of economic upheavals was over. The US government chose to do nothing and went the same way Iceland did.
    Now the government faces choices and again some are clearly wrong ie propping up industries that have had their day. Houray that Fiat is taking over Chrysler its about time for a V8 Bambino (what else could they make.)

  167. 167 Arthur

    Specific features of any crisis can be related to “choices” but when you have the whole world going into a synchronized crisis its really pointless looking for non-systemic explanations.

    Sure the US government could have chosen not to encourage housing loans to poor people. But that would have meant they didn’t get housing and the construction industry didn’t get jobs.

    The bubbles since the 1970s could easily have been pricked in the well known manner, by jacking up interest rates. That would have brought on the full scale crisis that appeared to be imminent in the 1970s.

    If they succeed in postponing the crisis now it will be as a result of essentially the same “choices” to keep on expanding credit which INEVITABLY produces bubbles. Both bubbles and scams are a natural result of that “choice” to maintain zero official short term interest rates.

    The alternative “choice”, which will ultimately not be optional is a depression worse than the 1930s.

    Apologists for capitalism will of course still blame it on the “choices” made rather than on the system itself.

    BTW US CPI figures for the 3% US inflation Steve predicted have now been released. They show -0.7% deflation for 12 months to April – cf -0.4% for 12 months to March.

  168. 168 Steve Owens

    Yes I was surprised that April recorded 0.74% deflation. All the more reason to expect the US to print even more money.

  169. 169 Jad

    In the Limits to Capital (p.85), David Harvey presents what I think is an interesting and relevant temporal perspective of Marx’s re devaluation and the velocity of movement of capital –

    ” when capital takes on a particular form, as a product waiting to be sold, as a commodity circulating in the hands of merchant capitalists, as money waiting to be transferred or used – that capital is ‘virtually devalued’.. Capital lying ‘at rest’ in any of these states is variously termed ‘negated’, ‘fallow’, ‘dormant’ or ‘fixated’. For example, ‘as long as capital remains frozen in the form of finished product, it cannot be active as capital, it is negated capital’. ”

    Thus, devaluation can be seen as a necessary ‘moment of the realization process’ and crisis arises from the failure of a certain velocity of circulation of capital to be maintained.

    The temporal dimension to the circulation of capital is one way, I gather, through which Marx repudiates “Say’s Law” (the view that, roughly, supply creates its own demand) – not something I know much about, but the validity of this Law is I think an area of divergence between Marx and the Austrian school.

  170. 170 Arthur


    I agree that is interesting, relevant and central to Marx’s exposition of capitalism generally and crisis in particular and one positive aspect of Harvey’s book is in stressing and helping understand that.

    But I wouldn’t put it in terms that “crisis arises from the failure of a certain velocity of circulation to be maintained”.

    When overaccumulation and disproportions blocks capital in its very temporal circuit or turnover of transformation from produced commodities to money to reinvested capital, value frozen in place in one or other of the successive forms it needs to pass through does not function as capital, which is value in movement, transforming and differentiating itself. This is highly visible in crises as unsold stocks, unused plant capacity, idle money and unemployed labour power existing (and stagnating) side by side when not kept in transforming motion to add value to capital. The resolution required for the flow to resume in proportions conducive to accumulation includes a fall in prices of the stocks, plant etc that are in fact worth less than they appeared to be in the boom since they cannot add value to themselves in the manner to which they wished to become accustomed.

    The semi-static “equilibrium” analysis of mainstream economics fails to grasp the temporal dynamic even when it tries to introduce dynamic models. The dynamic is not a dynamic equilibrium but a self-reproducing and self-transforming system of permanent disequilibrium evolving from its past to its future abolition.

    The idea that demand = supply or purchases = sales should be recognized as nonsense as soon as one notices the obvious separation of purchases and sales separated in time and space, with necessary lags for production and circulation, intermediated by money as a means of payment with payments made at different times and places.

    This is concealed in concepts like Gross National Product and Balance of Payments which obscure the actual temporal flows.

  171. 171 Steve Owens

    I did some back of the envelope calculations about GDP in the USA. From its hieght to its bottom GDP in the USA fell about 28%.
    The Economist magazine (yes I know capitalist appologists who Marx would have ignored ha) estimate that the USA will loose 3% this year and then go back to posotive growth next year.

  172. 172 Steve Owens

    Posotive? I think they meant positive you think that the guys at the Economist would spell better than that.

  173. 173 Steve Owens

    That’s from its height to its bottom during the Great Depression

  174. 174 Jad

    Yes, Capital as “value in movement, transforming and differentiating itself” captures the temporal dynamic well.

  175. 175 Steve Owens

    The US continues to stimulate it’s economy with borrowed money and may well struggle to sell treasury bonds later this month, I see that China is stimulating its economy with it’s savings. Nine MSN Money magazine 22 May 2009 reports that in Australian dollar terms China is spending $70 Billion on innovation
    $75 Billion on Housing
    $70 Billion on villages, drinking water and roads
    $28 Billion on health and education
    $39 Billion on energy efficiency and pollution abatement.

  176. 176 tomb

    I have been following the discussions at strange times however no time to add anything useful. I would like to comment briefly on the motivation dynamic change. I skimmed through Davids article and will look at it in detail ASAP. I agree with what he is saying.

    I don’t think we need to be looking to introduce anything new regarding motivation as it is already there. The motivation dynamic is changing as we speak and has been for some time. Companies moved to teamwork more than 20 years ago and now it is assumed. The initial increase in productivity was significant and consequently it was embraced by not only business but also in nearly every other field including education and sport. The teamwork productivity gains leveled out after a short time but there is no turning back as it is still a superior system. Workers embraced teamwork initially until it became obvious their role was limited and there was a small increase in job satisfaction and a large increase in profits.

    There is also the contradiction of teamwork and competition for promotion and now job retention. This contradiction also exists in education where students recognise the benefits of group work but are in a competitive environment for places at university etc.
    Workers and students are aware of the limitations of competition and it’s disruptive influence on teamwork. This is a major frustration but unfortunately they see no alternative at the minute The dynamic that is required to motivate in socialism is already there and waiting to be unleashed.

    BTW There is around 40% of Australians involved in volunteer work!

  177. 177 tomb

    sorry this somehow appeared on the wrong post have posted it correctly now

  178. 178 Steve Owens

    Bill it might be getting close to the time to call out Robert Brenner. In the article that you linked to he stated that he thought that the oncoming depression would be worse in China because they are more dependent on US and European markets. So far this has not happened. What length of time do you think we should allow for this prediction to be proven?

  179. 179 Bill Kerr

    hi steve,

    I’m still short of time unfortunately. I did reread the section of the Brenner article I think you are referring to. He didn’t say that the “depression would be worse in China”. He said:

    So the situation for China is much worse than what people expected, because the economic crisis is much worse than people expected

  180. 180 Steve Owens

    Bill, in the relevant section Brenner puts forward a prediction that China will suffer worse because the Chinese economy is dependent on exports to the USA and Europe. Plus and this is why he stresses that it will be worse is that he claims that there is a bubble within the Chinese system.
    The question is. Does the Chinese economy rely on a bubble to sustain it’s growth?

  181. 181 Arthur

    Brenner’s February prediction that the crisis in China would turn out worse than people were expecting at the time has already proved correct. It did. (Though it is still widely expected not to be as severe as elsewhere there is already less talk of China saving Australia from recession etc etc).

    Yes, there has notoriously been a bubble in China and it is now deflating.

  182. 182 Steve Owens

    I can’t disprove Brenner when he says that the situation in China is worse than what “people” expected. This is because he must know who these “people” are whereas I don’t.
    Arthur says that Brenner was correct because there is already less “talk” of China saving Australia. Well I can’t quantify “talk” but maybe “people” are “talking” less about China shielding Australia from recession because thats whats happened. Australia is still yet to enter an official recession. Australia is a commodities economy, China which isn’t in recession is still buying Australia’s stuff. commodities.

  183. 183 Arthur

    Of course there is still some talk of that “only Chinese capitalism can save Australia”.

    Steve’s confidence accurately reflects the mentality that drives speculative bubbles such as the current absurd “recovery” of Australian export prices to China in a situation of overproduction and declining demand.

    The assumption is that all that cash being pumped in has to go somewhere so prices can be expected to go up. Like any ponzi scheme that works for a while and then collapses.

    Nevertheless “people” are a lot less confident in their magical beliefs than they were in February. Steve excepted of course.

  184. 184 Steve Owens

    I must apologise to Dalek. I was amongst the first to ridicule his idea that China had successfully “decoupled” from the US market. Absurd I thought, China doesnt have an economy it just produces for the western market.
    Well thats an idea Im prepared to re examine. The latest edition of the Economist reports that fixed investment in China is growing at it’s fastest pace since 2006.

  185. 185 Steve Owens

    Arthur that link to todays Australian. I read that this morning and rolled my eyes. Yes what great analysis. If commodity prices hold we are in good shape and if commodity prices fall then we are in trouble. And they pay people to write this stuff no wonder newspapers are going out the door backwards.

  186. 186 Arthur

    The point of the linked article was that the still widespread (but rapidly diminishing) optimism about Australian exports to China rests on the extremely shaky grounds that the recovery over the last 3 months (following collapse in 2008) will be sustained – despite there being very good reasons (explained in the article) to expect otherwise.

  187. 187 Steve Owens

    Yeah I was a liitle harsh on the linked article however I do think that pessimism towards growth in China is misplaced as “the wall of money” argument has a problem.
    If the wall of money was being pushed into a developed economy then I would agree but China has lots of scope to absorb that money in economically sensible ways ie raising the living standards of the Chinese people.
    On 19 May the Reserve Bank of Australia Govenor not only stated that China had recovered all the losses made during 2008 but that a similar pattern is happening in Korea.
    The Chinese economy is on the road to development, they have a wall of money to fund this development and this fact is a clear difference from our current position and the one faced in the 1930’s

  188. 188 Steve Owens

    Bill, in our discussions here and in private emails I have gathered the impression that you think that a return to the gold standard would inject some sense of reality into the system as the Austrian school argues.
    If you look up Churchill on Wikipedia it gives a fasinating account of Winston when he was the English Chancellor of the Excheqer. He reintroduced the gold standard, in his speech to support the bill he said
    “I will tell you what it [return to the gold standard] will shackle us to. It will shackle us to reality”
    Keynes predicted that a return to the gold standard would result in a depression. Churchill to his credit later aknowledged that it was a great mistake.
    I think Churchill matches my view of what Austrian ideas mean in practice. Churchill reintroduced the gold standard, urged the use of machine guns against striking workers and hailed Musolini as a “genious”

  189. 189 Bill Kerr

    Useful information about Churchill and the gold standard.

    I think both positions could be true. Keeping the gold standard would make money more real, less like funny money, which may delay but ultimately not prevent economic crisis. And Austrian school policies may well lead to oppression of striking workers since the Austrian policy is to get rid of all interference in market forces.

    So, I guess Steve that the marxist analysis is the only remaining one with any real credibility.

  190. 190 Arthur

    There’s not much doubt that gold standard would intensify and accelerate outbreak of financial crisis. Problem they have is that without gold standard they have been unable to provide a stable currency with “real” value so crisis breaks out anyway with desperate flight from productive investment to (illusory) “real” value including revival of gold.

    Incidentally this also takes the form of other forms of hoarding including speculative stockpiles of other minerals. eg At the moment there’s a 4 months stockpile of (non-stragegic) iron ore for China fed by “record” imports at nearly twice monthly actual consumption despite 30% of Chinese steel capacity closed down and continued decline of contract prices.

    Lots of “stimulus” money going into “investment” in iron ore stockpiles ie speculation that absurdly rising spot prices will continue.

  191. 191 Steve Owens

    Just an interesting aside. The “Green” economy will make rare earths central to production. China as Deng once pointed out has a virtual monopoly on rare earth production. He equated China’s possession of rare earths to the mid east’s possession of oil. China has put a limit on rare earth export and has taken a big stake in Australia’s 2 rare earth producers. Also of interest is Bolivia’s near monopoly on Lithium. The Socialist government has announced that any company developing Lithium in Bolivia will have to re invest the profit in Bolivia. Damn Scottish scientists have developed a lithium free battery. Lets hope it doesn’t work Bolivia needs the money. Sorry I’m twittering again.

  192. 192 Steve Owens

    Bill the problem with Marxism being the only analysis that has any real credibility is that what passes for Marxism can never be proved wrong. Marx expected Capitalism to fall over within his lifetime. When it didn’t Marxists said just wait and see. Now we have been waiting a long time and when I check with Marxists they say just wait and see. Well like Marx many more Marxists will die while we are waiting to see. Arthur will never be proved wrong because the next big bust will be just around the corner, just you wait and see.

  193. 193 Glenn Poston

    A stimulas story. This little ol town looks deserted. Times are tough everyone is in debt and lives on credit. When in comes this this rich tourist. He checks in at the hotel and pays the 100 euro. and goes upstairs in order to pick one. TRhe hotel owner take the 100 note and pays the butcher. the buther pay his 100 debt to the pig owner. the pig owner pays his 100 debt to the feed and fuel owner. The feed and fuel owner takes the 100 to pay his prostitute who was working on creidt during hard rimes. The hooker runs to the hotel and pays 100 debt for the rooms rented. the hotel owner lays the 100 note back on the counter, and at that moment the rich tourist comes down after inspecting the rooms. Then he takes the 100 note saying his not satisfied with rooms and leaves town. No one earned anything,but the town is without debt and looks to the future. Now thats United States Government doing business today. Im so glad the hooker and hogs made out ok.

  194. 194 Steve Owens

    Glenn thats a funny joke. The problem for the US government is that it owes 11 Trillion dollars. The US has a 14 Trillion dollar economy, you would start to think that the credit card is about maxed out. Maybe Obama will get lucky and some rich Chinese tourist will leave an $11 Trillion bill at reception.
    Its hard to see the Republicans returning to the Whitehouse any time soon having left the new administration with 2 wars an economic crisis and $11 Trillion in debt.
    According to Futurama the president on the $11 Trillion dollar bill is Al Gore

  195. 195 Steve Owens

    Before anyone jumps over my rounding up of numbers to be more precise when G.W.Bush took office the debt stood at $5.7 and on the day he left it was $10.6 both are Trillions.

  196. 196 Glenn Poston

    Its not a joke, We will never ever get out of debt when money is created out of nothing. Then we pay interest on that which was created out of nothing. When people voulenteer for ems do whats in it for them. when anyone volunteers whats in it for them. I hear that back in the day, people use to help one an other build houses for their children with the help of their children.

  197. 197 Steve Owens

    I think America could get out of debt but your leaders would have to change their ways cut costs and raise taxes.
    America subsidises agriculture. It’s getting better but a couple of years ago from memory it was $15 Billion not a great deal but there’s no reason that the US tax payer should foot the bill for inefficiency.
    The US spends 6% more on health care than Canada does. (6% as a proportion of GDP) Again its political and its expensive. Every modern economy runs a socialised health system except the US. Its billions of dollars of unnecessary cost that the tax payer cant afford.
    Having subsidised agriculture the US government is now subsidising industry. Give me a break the US should do what its preached to the world and let free enterprise kill off inefficiency.
    Then there’s military spending for which the US accounts for about half of world spending. There’s no global threat to the US, I can’t believe there’s not huge savings that could be made. The US spends about 4% of GDP on defense and about 16% on health so you might prioritise health reform over military reform.
    Then there’s taxation, can anyone really believe that lower taxes result in higher tax take (except during a bubble) Americans must bite the bullet and pay more tax. The Republicans have been lying for years about how tax cuts would increase tax revenue.
    The debt can also be lessened by allowing inflation to ramp up. Honestly a year of hyper inflation and you really will think of 10 trillion as a small number but I wouldn’t recommend it.
    Now don’t think that I’m having a go I think that America is a long way from rooted, it still has the most efficient, dynamic economy in the world, its leaders are capable of thinking through the problems and even though total government debt is approaching 100% percent of GDP most ordinary folk go into debt 3-400% of their income when they buy a house. If the house is sound and I think the US economy is then we can all look forward to better times just not this year.

    As to people helping each other build houses, yes that happened here when my parents migrated. Lots of migrants helped each other build their houses it works well amongst people with some building skill but not much capital but generally its house building as a cottage industry which is not as efficient as hose building as an industrial enterprise.

  198. 198 Glenn Poston

    Steve i just fiqured it out. No one really cares about the greater good of mankind. Its all about whats in in it for me. If I do not have any thing to gain forget about it. With money any man or woman can be bought for a price. For the life of me I cant understand why people cant use their brain. We elect a few to try and do whats right, only to find out their ego was in the way. Its always whos opinion is right? A computer processes billoin bits per second and comes up with the best solution. Look at me im still kidding myself. No one cares If I only had a brain i could understand said the scarecrow look

  199. 199 Steve Owens

    Latest US inflation rate for May just posted at negative 1.28% this gives us 3 months of deflation trending down. Me and Peter Schiff look a little off with our predictions of inflation and hyperinflation although to be fair Schiff says that hyperinflation will take off as the world comes out of recession.

  200. 200 Steve Owens

    Bill are you following Schiff’s blog? It seems to me that he’s shiffting his position. First he says hyper inflation is coming then it’s hyper inflation when the economy recovers and now it’s hyper inflation is but one possibility.

  201. 201 Bill Kerr

    Sorry, still not keeping up. Here is a problem that others might suffer from too. The whole issue is too big to keep up with unless full time on it. But it’s also hard to break into parts.

    My currrent thinking is that I ought to focus on one thing – the law of value – and try to make sense of that. That might be an approach that works for some others too.

  202. 202 Arthur

    Understanding law of value is indeed central.

    An (over)simplified version is that the conditions of production (technology, resources etc) objectively determine necessary ratios in which goods and services must be produced and labor devoted to producing them, but with private ownership the necessary proportions can only be established by an anarchic process of exchange establishing fluctuating market prices and rates of profit that reveal the disproportions.

  203. 203 Bill Kerr


    Jim Lehrer Moderates a Forum With the Fed Chief

    I caught part one the end of this on NewsHour (SBS TV, 4:30pm most nights although they kick it to an earlier time slot when the more important cricket is on)

    Some interesting discussion by Bernanke about “too big to fail”

  204. 204 Steve Owens

    Bill I started to watch this but Bernanke puts me to sleep.
    On another matter I just wanted to flag an idea about debt.
    Arthur has claimed that the big depression in the 1980’s was forstalled by increasing debt and that the current problems may also be pushed back by debt.
    Now increasing debt may well be a disaster for one country but is debt a sign that the system is in trouble?
    Debt is the already realised profit being transferred to another section of the system to be used for production or consumption. Yes it funds bubbles but it also funds productivity improvements.
    Ok my point is that on a system wide level debt is nothing more than transferring money from one pocket to the other. It makes no sense to declare one pocket broke both pockets need to be counted.

  205. 205 Arthur

    Understanding money and hence also debt is critical to understanding capitalism and crisis.

    Money as a means of circulation merely transfers commodities and their values from one to another.

    Money as a means of payment circulates commodities by promises to pay in the future (debts).

    There’s a difference. Promises cannot always be kept.

  206. 206 Steve Owens

    Im trying to get some perspective about US government debt.
    Prior to GW Bush the US government ran a surplus of $283 Billion.
    It currently faces a deficit of $438 billion.
    Now most of this can be accounted for by Bush’s tax cuts which amounted to $500 Billion. From memory these tax cuts are temporary and the old tax rates will resume after Obama’s promise not to curtail them expires.
    Once the budget is put back into surplus which I think will happen, the debt can be erased as it currently takes 18% of US government revenue to service.

  207. 207 Bill Kerr

    This NY Times September 2009 article by Paul Krugman provides a comprehensive overview of the state of play of the Keynesian approach to the crisis:
    How did economists get it so wrong?

    So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics

  208. 208 tomb

    so in plain english, Have faith and pray!

  209. 209 Arthur

    I found How did economists get it so wrong by googling title and following a link from another blog (presumably using its own subscription).

    Please provide title for the other one – and future links to publications that want registration for access. As few people as possible should actually register to avoid encouraging them to accelerate shift to paid access to content.

  210. 210 Arthur

    Just realised:

    1 that other link was to same title.
    2 that the link i provided may also require registration.

    3 if so please confirm whether it did or didn’t work so we can figure out what does and does not work in future and

    4 try this link:


    5 i think the &partner= stuff is what makes it not require registration. please confirm whether that works too.

    6 Haven’t finished reading yet but will just comment on this bit:

    But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

    This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right: “Depressions are not simply evils,” declared Joseph Schumpeter in 1934 — 1934! They are, he added, “forms of something which has to be done.” But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions.

    I suspect it reflects Kruger’s shallowness rather than Schumpeter’s. Kruger treats it as self-evidently a complacent justification for capitalist Depressions. Don’t know but I think it was more likely to be pointing out, as Marx did more emphatically, that they are the (necessary, unavoidable) periodic forcible resolution of contradictions.

    Kruger’s own complacent Keynesian assumption that crises are avoidable seems to have made that interpretation inconceivable to him.

  211. 211 Arthur

    I find Kruger repetitive and “deeply superficial” (sort of like Thomas Friedman on “the next six months”).

    I doubt that Keynesianism will be “the only game in town”. Even its mainstream opponents can easily refute Kruger’s mush:

    And that’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days.

    One doesn’t have to find the mainstream “fascinating” to see that Kruger has no interesting ideas…

    What he does have is a good spiel for undermining some of the propaganda fed to undergraduates using terms such as “efficient markets” that are intended to be misunderstood. But Krugman himself doesn’t actually understand what the mainstream are actually talking about with such terms (as opposed to the propaganda use of them).

    Here’s a reasonable explanation of what the “Efficient Markets Hypothesis” actually implies:

    One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier. (The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.)

    In fact arbitraging and its more recent spectacular failures show the uncertainty is even more radical and fundamental than implied by the EMH and related Capital Asset Pricing Models, let alone as mechanically controllable (and therefore presumably also predictable and at least observable) as implied by Keynesianism.

  212. 212 Steve Owens

    Bill, Krugman in his New York Times blog on November 3rd has an interesting graph comparing 1929 and 2009.
    BTW earlier this year I was arguing that shares were under priced and Arthur was arguing that they wernt. Im thinking of buying a Harley with the profit.

  213. 213 Bill Kerr

    Peter Schiff definitely got my attention last night with his DateLine interview with George Negus:

    PETER SCHIFF: The problem is, he (referring to Obama) is leading us in the wrong direction. He is leading us over the edge of a cliff. We can’t afford these grandiose health care programs. The country is already broke – this is just going to accelerate that. We are heading – the real economic crisis is in front of us, it’s not behind us. Before Barack Obama leaves office, there will be a currency crisis. The US dollar will collapse, and prices in this country for consumer goods are going to go ballistic, and so will interest rates, and we are going to be living in an economy with unemployment closing in on 20% and double-digit inflation and double-digit interest rates.

  214. 214 Steve Owens

    Thanks Bill, personally I cant get enough of Schiff mainly because he talks straight and doesnt fudge anything. I think hes right about the direction of the US dollar and of the gold price. He thinks that the US is taking the banana republic option of printing its problems away but he does not think that Capitalism is broke as he advises his clients to invest in Asia where Capitalism is working.
    My real problem is that I think his economics are inflexable ie theres never a time to defict spend, or to run an inflationary monetary policy.
    He’s stuck with the Austrian mantra of government bad, government bad and thats why he will remain as an entertaining sideline act in an age where governments play a major role in the economy.
    On Schiff’s blog I liked his stuff about the paradoxical fear rallies of the US dollar.

  215. 215 Bill Kerr

    steve, commenting about Peter Schiff:

    … I think his economics are inflexable ie theres never a time to defict spend, or to run an inflationary monetary policy

    He’s stuck with the Austrian mantra of government bad, government bad and thats why he will remain as an entertaining sideline act in an age where governments play a major role in the economy

    I agree that his economics are inflexible and that he sounds too sure of himself. I thought Steve Keen’s evaluation of Austrian economics was well worth reading

  216. 216 Bill Kerr

    Some very interesting papers here by Ken Rogoff, who presents a gloomy view of the future:

    Who is Ken Rogoff? He has worked for the IMF, been on the Board of Governors of the Federal Reserve, is a coauthor with Bernanke of macroeconomic studies, and one of the authors of a recent best seller This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff. The papers at the above URL include a draft of this book as well as other more recent material.

  217. 217 Arthur

    Thanks for ref to Rogoff and Reinhart. “This time its different” looks like a very useful empirical survey of history of crises (confirming that capitalism is a system of booms followed by busts with perennial optimism and loss of historical memory).

    Also interesting confirmation that there is currently no model of exchange rates much better than “random walk”.

    This Preface to Foundations of International Microeconomics seems to indicate both that it will take a lot of study to get to grips with the non-apologist literature actually trying to figure out how things work and that they haven’t got very far!

  218. 218 jim sharp

    as most boffins at this site call themselves geuine lefties an everyday prolie loke myself wud expect you genuine interlectual thinkers be looking back to the future by bringing up to speed the false consciouness of 21century economist as engels did in his outlines of a critique of political economy 1844 here’s a few quotes which accorded withmy experiences

    Political economy came into being as a natural result of the expansion of trade, and with its appearance elementary, unscientific huckstering was replaced by a developed system of licensed fraud, an entire science of enrichment.

    Political economy came into being as a natural result of the expansion of trade, and with its appearance elementary, unscientific huckstering was replaced by a developed system of licensed fraud, an entire science of enrichment.

    We gladly concede that it is only the justification and accomplishment of free trade that has enabled us to go beyond the economics of private property; but we must at the same time have the right to expose the utter theoretical and practical nullity of this free trade.

    It will become evident that the protagonists of free trade are more inveterate monopolists than the old mercantilists themselves. It will become evident that the sham humanity of the modern economists hides a barbarism of which their predecessors knew nothing; that the older economists’ conceptual confusion is simple and consistent compared with the double tongued logic of their attackers, and that neither of the two factions can reproach the other with anything which would not recoil upon themselves.

    It will become evident that the protagonists of free trade are more inveterate monopolists than the old mercantilists themselves. It will become evident that the sham humanity of the modern economists hides a barbarism of which their predecessors knew nothing; that the older economists’ conceptual confusion is simple and consistent compared with the doubletongued logic of their attackers, and that neither of the two factions can reproach the other with anything which would not recoil upon themselves.
    More>> http://atheism.about.com/library/marxism/bl_MarxOutlines.htm

  219. 219 Bill Kerr

    Slate article subtitle: The 15 best explanations for the Great Recession
    list of possible explanations for the crisis, although this article is just an (incomplete) checklist, it does provide a useful overview of mainstream thinking and some of the links (to books) are valuable – follow the links in the original article:
    – Greenspan’s easy money polcies (conservatives);
    – regulatory failure (liberals);
    – global savings imbalances; lack of transparency of Banks;
    – excessive reliance on mathematical models;
    – implicit too big to fail ethos leading to excessive risk taking;
    – Hank Paulsen’s initial response to the crisis made things worse; – – greed, stupidity, short-sightedness (worst explanation);
    – recurring delusions about risk and bubbles (Reinhart, Rogoff book which I mentioned earlier);
    – free market fundamentalism (Cassidy book – good readers reviews, it includes a strong historical perspective);
    – globalisation spread toxins from the USA to the rest of the world (Stiglitz book – good readers review);
    – free market failure (Posner book, he has converted to Keynesian)

    Some of the readers reviews for the Cassidy and Stiglitz books are quite detailed and serve as a summary for those books. The only mention of overproduction I noticed was in a readers review to the Stiglitz book – but his portrayal of it is one factor amongst many, not of particular importance

  220. 220 Bill Kerr

    Karl Marx’s economics: critical assessments edited by John Cunningham Wood

    I came across the above book whilst researching paul samuelson’s views on marx. It includes essays by Meek, Samuelson, Bronfenbrenner, Morishima, Itoh, Wolff and others.

    Also here is a separate page of quotations from Samuelson about Marx. Warning: do not click if you have a predisposition to epilepsy triggered by appalling graphics

    aside about google books: The series on Marx of which the above is a part sells for an amazing $2,550.00 (Routledge ). Google books whilst far from satifactory (limited pages, difficult to print) at least gives us a quite comprehensive look at books that are too expensive and numerous to buy. The limitations also point to a need for an open source publishing revolution. Some of the books I have been looking at are over 60 years old but still not out of copyright, which has been extended in recent years.

  221. 221 Bill Kerr

    Real World Economics Review blog is running a competition for the ignoble award in economics :

    With other learned professions entrusted with public confidence, such as medicine and engineering, it is inconceivable that their professional bodies would not at the very least censure members who had successfully persuaded governments and public opinion to ignore elementary safety measures, so causing epidemics and widespread building collapses.

    To date, however, the world’s major economics associations have declined to censure the major facilitators of the GFC or even to publicly identify them. This silence, this indifference to causing human suffering, constitutes grave moral failure. It also gives license to economists to continue to indulge in axiom-happy behaviour. Nor has the economics establishment offered recognition to those economists who were not taken in by fads and fashion and whose competence, if listened to, would have prevented the collapse …

    The nomination, evidence and final winners procedures are explained at the site.

    Nominations are found on the sidebar (click to see some comments) and so far include Greenspan, Bernanke, Prescott, Fama, Kydland, Black, Stigler, Summers, Friedman, Scholes and Geithner.

  222. 222 Bill Kerr

    arthur’s comments above about Fama and the Efficient Market Hypothesis have been very useful in thinking things through.

    Here is some follow up information about EMH that might be useful:
    The Efficient Market Hypothesis and Its Critics by Burton G. Malkiel, for clear explanation of what the EMH is in the beginning part of this longish pdf

    INTERVIEW WITH EUGENE FAMA Posted by John Cassidy
    (also check the sidebar for other interesting interviews – I have so far read to interviews of Cochrane and Posner as well)

    Defending the indefensible
    Defending Fama against his critics
    (plan to keep an eye on this blog)

    The AHA moment for me is wedding the notion of the truth of the EMH to the notion of uncertainty, which Keen actually traces back to Keynes (The Minsky Thesis: Keynesian or Marxian ) as part of Minsky’s heritage

  223. 223 steve owens

    Bill at the time that the “tale of two depressions” study came out Krugman commenting on the study in his blog acknowledged that the current crisis could be a 30’s rerun. However he points out that the difference is knowledge, the knowledge of how to manage crises.
    Now that the IMF is predicting almost 4% world economic growth, now that the UK has declared itself to have passed out of recession and now that Obama has released a modest debt reduction plan I’m pretty sure that the crisis has been managed. The economy is no longer a mad machine that no-one can control.
    Yes debt still is problematic but Clinton ran surpluses its not impossible for Obama to do the same.
    Republicans have likened Obama’s debt reduction strategy to a man who announces a diet the day after he wins a pie eating contest.
    Wow they can barely wipe the pie off their own faces.
    PS some time ago I predicted that the US would have an inflation target around 3%. If you look it up I think you’ll find that it now sits at about 3%

  224. 224 Bill Kerr

    steve: “The economy is no longer a mad machine that no-one can control”

    I would say that the historical trend since the 60s has been progressively increasing instability and unpredictability of the economy, what Brenner calls the long downturn. Since 1975 there has been chronic unemployment and events such as stagflation that are not explained by the dominant neo classical model. So, apart from the post WW2 boom (say 20 years) the economy hasn’t been behaving in a predictable or satisfactory way.

    Perhaps what you really mean is that capitalisms ability to recover from severe crisis has improved since the Great Depression and that it is hard to predict when the next crash will come. Some of those more far sighted economists who want to save capitalism admit that it is a highly unstable system that requires insightful interventions to deliver (Stabilising an Unstable Economy by Hyman Minsky). I would add interventions that are impossible to deliver because of political incoherence of the sort we are now witnessing in the USA as Obama’s agenda unravels.

  225. 225 steve owens

    Bill “The the economy is not behaving in a…..satisfactory way”
    Satisfactory to whom Bill to the billion people that have risen out of absolute poverty in the last 30 years, satisfactory to the wealthy elite of the world who have become richer in absolute and relative terms or satisfactory to the billions of ordinary folk that are experiencing lives that their parents and grand parents could barely imagine.
    Ok the neo classical model is inadequate I never thought that it was.
    Bill the long boom was the aberration Capitalism has returned to booms and busts and scams but the reality is that Capitalism has not yet fettered itself it remains a system that continues to expand production.
    PS I don’t believe that Obama is politically incoherent, he’s a middle of the road Democrat and as such has stimulated the economy tick, he is reforming the US health system which has proven to be ineffective and expensive tick, he has expanded the money supply to achieve the inflation target tick, and he is about to reduce the governments deficit tick. You might not like these things but they are not politically incoherent.

  226. 226 Bill Kerr

    Steve wrt your Obama PS: I was referring to the panic within the Democrats following their recent loss in massachusetts (scott brown) and Obama’s turn to populism following the backlash against his generosity to Wall Street. It’s difficult for him to follow consistent economic policy and to remain popular, irrespective of the wisdom of his economic advisors.

    As for the rest of it you seem to have withdrawn your statement that “The economy is no longer a mad machine that no-one can control”

  227. 227 steve owens

    Bill I wasn’t saying that the economy is a mad machine that no one can control that’s a line from a Redgum song reflecting the “Marxist” view. I was just using it as a form of parody.
    On Obama and popularity he has stated that he would rather be a one termer who did whats responsible rather than a two termer that just does whats popular. We shall see.

  228. 228 steve owens

    Bill clearly after the Scott Brown win the Democrats should hit the panic button. The Republicans after a 5 point win in a bi election during an economic crisis are unstoppable. The Democrats have nothing I repeat nothing except the Presidency and majorities in both houses and an economy that improved at a rate of 5.7% in the final quarter of last year. To quote Stephen Colbert employment wont recover until the end of President Palin’s first term.

  229. 229 Bill Kerr

    The Debt Deflation Theory of Great Depressions (1933) by Irving Fisher is well worth a read

  230. 230 tomb

    Found the debt deflation interesting but he might have published a year too early. Think his answer may stem from the fact that he doesn’t attribute the initial debt and misses the role of profit.

  231. 231 Arthur

    Thanks for the link to Irving Fisher.

  232. 232 Bill Kerr

    Bernanke: an expert on the great depression?
    I didn’t really understand why Steve Keen called his blog “debtdeflation” until I read the Fisher analysis. Steve Keen argues that Bernanke does not understand Fisher because Fisher rejected the idea that the market is always near equilibrium

    And so to this day, the pinnacle of neoclassical economic reasoning always involves “equilibrium”. Leading neoclassicals develop DSGE (“Dynamic Stochastic General Equilibrium”) models of the economy. I have no problem–far from it!–with models that are “Dynamic”, “Stochastic”, and “General”. Where I draw the line is “Equilibrium”. If their models were to be truly Dynamic, they should be “Disequilibrium” models–or models in which whether the system is in or out of equilibrium at any point in time is no hindrance to the modelling process.

    In conjunction with Fisher’s analysis (which is quite possibly incomplete due to it’s downgrading of overproduction) this very scary graph of the american economy ought to be widely distributed:

  233. 233 Barry

    Bill, Does the graph show private debt or government and private debt?

  234. 234 Bill Kerr

    hi barry,

    This graph seems better, it breaks it down into contributions from households, corporates, financials, government sponsored enterprise and government.
    (the total debt/GDP% is higher for the Great Depression in this new graph cf the other one, not sure why)

    Household debt is a bigger contribution than corporate debt in the current crisis. I found some of the comments on the new link to be helpful, eg. comment 3 by slag

    What Fisher said in his article was that you get a depression when both high debt and falling prices happen (debt deflation). So the government intervenes with stimulus to stop prices falling. But this means the debt continues to spiral upwards, which is where we are at the moment. London Bankers comment in 2008 was:

    Had Fisher observed the Greenspan/Bernanke Fed in action, he might have updated his theory with a revision. At some point, capital betrayed into unproductive works has to either be repaid or written off. If either is inhibited by reflation or regulatory forbearance, then a cost is imposed on productive works, whether through inflation, higher interest, diversion of consumption, or taxation to socialise losses. Over time that cost ultimately hollows out the real productive economy leaving only bubble assets standing. Without a productive foundation, as reflation and forbearance reach their limits, those bubble assets must deflate

  235. 235 steve owens

    Bill that debt graph is really scary. My god public debt in the USA stood in 2009 at 52% of GDP. This is clearly unprecidented no where in US history has public debt stood at such a high level.
    Except for 1950 when debt stood at 80% of GDP. Boy I bet that was followed by economic collapse or maybe it was followed by the long boom, yes I think that 80% public debt to GDP in 1950 was followed by the most impressive boom in Capitalisms history but still scary graph.

  236. 236 Bill Kerr

    hi steve,

    Thanks, I’m looking it into it more. If you look at the second graph I linked to in response to Barry’s question you’ll see that the debt:GDP ratio has been increasing in all sectors – households, corporates, financials and government – over the past 10 years. The trend after 1950 was in the opposite direction. Fisher’s analysis is that a Depression occurs when you have both high debt and falling prices (debt deflation). I don’t think government can provide endless stimulus so there is more pain ahead.

  237. 237 steve owens

    Hi Bill yes you are correct about the trend. The US public debt after 1950 dropped to 46% by 1960 but the debt increased, it only became a lesser part of GDP because GDP grew. The significant number (in my view) is the growth figure.
    PS have you seen Steve Keen’s stuff about his trek to Mt Kosciusko. Its entertaining but it still amazes me how someone can be undertaking their part in a lost bet while at the same time explaining why they were right all the time.

  238. 238 Bill Kerr


    Your 1950 figure just shows that there was a debt overhang arising from WW2. The current trends of high unemployment and sluggish growth are totally different from 1950.

    United States Government’s Budget & Debt (Obama Edition)
    This article is informative. If you scroll down to the section “current trends are not sustainable” it shows that mandatory spending (such as welfare and medicare) has become greater than total government revenue, in the USA. The author Mark Wieczorek says:

    This graph has haunted me ever since I first saw it 3 or 4 years ago …

    Yes, I’ve been following the Steve Keen walk issue. I think what it shows is that you can’t predict precise detail but nevertheless his overall analysis of what will happen in the longer term seems sound to me. I admire the way in which he has turned a bad thing into a good thing and is generating incredible support for his walk. btw one of the T-shirts he has produced for the walk features the debt:GDP ratio graph, this time for Australia, which I unsuccessfully tried to scare you with.

  239. 239 Bill Kerr

    correction: the “current trends are not sustainable graph” (Wieczorek) shows a projection through to 2070 in which mandatory spending will become greater than government revenue.

    The current turmoil over the US health care debate b/w the “caring’ Democrats and the “individualist” Republicans masks that deeper dilemma in the US economy.

  240. 240 steve owens

    Bill the US public debt was run up by government spending in WW2 however US government debt in nominal terms didn’t decrease during the 1950’s they borrowed more money throughout this decade. If it was just an overhang from WW2 one would expect the debt to decline once the war was over. The debt crisis of the 1950’s was resolved by growth in the American economy pretty much as this one will be.
    I think Steve Keen is and will continue to be wrong. The US housing market collapsed because the government gave big tax cuts that went into housing speculation, the government repealed laws dating back to the 1930’s that regulated banks. the government ran a low interest regimen, the government mandated that banks make loans to non credit worthy clients.
    In Australia the Banks are well regulated and pretty secure. The only market distortion that the government indulges in is the first home buyer scheme which as a market distortion is small beer.
    The banks here are well run not because of some innate goodness but because correct lessons were drawn from the banking crises that destroyed Bank of South Australia, Bank of Melbourne, the Pyramid building society and almost from memory ANZ bank. The US had the opportunity to learn lessons from the bank crisis that occurred during the presidency of George Bush senior the Savings and Loans crisis.

  241. 241 Bill Kerr

    The debt crisis of the 1950’s was resolved by growth in the American economy pretty much as this one will be

    Steve, other writers be they enemies of capitalism (Marx) or saviours of capitalism (Fisher, Keynes, Minsky) have pointed out that capitalism has severe problems in maintaining conditions such as full employment and ability to avoid periodic crisis that ordinary citizens expect of a rational economic system. You on the other hand just seem to take the view that “she’ll be right mate”. When I talk to people I work with I find that, post crisis, they have a much more pessimistic view of the ability of this system to deliver ongoing prosperity than you do. Or maybe you just have a psychological preference to playing the devils advocate, since that requires less work than trying to figure out what is going on? Do you have opinions about the inner contradictions of capitalism?

  242. 242 steve owens

    Bill Capitalism does not have”severe problems maintaining conditions such as full employment” Capitalism does not care about full employment. (recently economists have started calling 5% unemployment full employment)
    Capitalism cant avoid periodic crises because Capitalism is a system of periodic crises.
    “ordinary citizens expect a rational economic system.” Ordinary citizens can want the moon, what they want doesn’t effect reality (not yet anyway)
    People you work with are more pessimistic well so they should be they have lived through the GFC, it was very scary.
    Am I just playing devils advocate? Well no, when you pointed out those graphs that indicated that the current situation was worse than the Great Depression I just pointed out the weaknesses in that argument. I don’t see any updated graphs showing that the world is plunging towards depression. No the argument has now changed to debt levels. To answer scary graphs about debt levels Ive put an argument heavily relying on the writing of Paul Krugman. My arguments on debt are his arguments so I guess the real question is Is Paul Krugman playing devils advocate.

  243. 243 Bill Kerr

    My point has nothing to do with you contradicting the debt:GDP argument, which in itself has some value. I’m happy to look more at the 1950s data and what it means.

    My point is that in all discussions about economics you play the role of devil’s advocate without seeming to have a position yourself about the internal contradictions of capitalism. So there appears to be no internal consistency to your own arguments at various points against myself, tomb, arthur. ie. you argue a general position that capitalism will recover without any real analysis of your own about its problems and contradictions. As in this case you just seem to borrow arguments from others as long as they contradict what someone here is saying. It doesn’t add up to a position that you have or that you are developing. That spoiler role might have some value some of the time but over a longer period it just seems that you are contradicting for the sake of it.

    “Capitalism does not care about full employment, etc.”
    I think the whole basis of capitalist economics is Benthamite utilitarianism, the greatest good for the greatest number, and when that breaks down with long term chronic unemployment in Australia since 1975 this creates a huge problem. The rise of the issue of aboriginal welfare dependency over the past few years illustrates that capitalism realises it just can’t be ignored (just one example there are others).

    If you read Keynes, General Theory, it is clear that he thought capitalism ought to deliver full employment. That expectation has been gradually eroded by reality over the past 40 years, what Brenner calls the long down turn and now we have a crisis. That creates a theoretical crisis for capitalistic intellectuals, a similar crisis of the 1930s which Keynes tried to answer. Rather than acknowledging that crisis you are just saying the goalposts have shifted.

    “I don’t see any updated graphs showing that the world is plunging towards depression”
    Nothing you said made me think you had read or thought about the Wieczorek article

    “I think Steve Keen is and will continue to be wrong … The only market distortion that the government indulges in is the first home buyer scheme which as a market distortion is small beer”
    Not sure, haven’t studied it enough, but obviously Steve Keen disagrees with you about the first home buyers scheme

    I haven’t read Krugman for a while but in googling around on debt:GDP ratio I did notice that some commentators do see it as a big deal and argue that some countries are not in a position to recover because of debt deflation, eg. Britain, Japan

  244. 244 steve owens

    Bill I reread Wieczorek’s article and it still seems quite reasonable.
    Bill I have objected to stuff you, Arthur and tomb have posted but look at it.
    You posted an article that had the GFC outstripping the GD
    I suggested that the trends identified in the article would not hold up. Is it my fault that world economic growth returned?
    Arthur stated that shares were overpriced. I suggested that they were under-priced, is it my fault that soon after the stock market rose 60%?
    Arthur stated that we were in for a period of deflation, I stated that I thought inflation would soon return to within a band of 2-3%. Is it my fault that for most of this year US inflation has sat in a band between 2 and 3%.
    tomb stated that Feb was a bad month for the Chinese PMI. I pointed out that Feb was a month reduced to 18 days.
    Its not my fault as Barry would say its a truck called reality.

  245. 245 steve owens

    Bill a good sanity break is Paul Krugmans blog New York Times March 27. At 4.11 pm. I dont always agree with Krugman but I like his ideas on debt its very unscary.

  246. 246 steve owens

    Bill You say that I don’t seem to have a “position” or even to be “developing” a position.
    Well I think that the “position” Ive put here is pretty clear.
    1 That economic crises by themselves are unable to unravel capitalism. Behind this is an assumption that “Marxists” have laid too much emphasis on the economic under structure of society a sort of economic determinism often given away by a mystical reference to the tendency for the rate of profit to fall.
    2 For an economic crisis to gain the momentum there needs to be mismanagement of a pretty gross degree. With the GFC this has come with alot of well criminal activity from the banks. What Morgan Stanley have been doing to Greece is pretty impressive.
    3 Despite the above to turn the GFC into the GD I think we need a trade war which some protectionist minded people seem to approve of.
    4 If the GFC did come to a realignment of class forces the next problem would be a mobilisation of class forces and if the GD is our guide then we should be prepared for a mobilsation of the right wing class forces.
    So you see I dont have a “she will be right attitude” I think what is happening in the world is quite serious but my hope is that it will become less serious rather than more. The essence of whether things get better or worse is political. Why I am opptimistic is that I think that the Capitalists that run their system are not locked into action but that they have good and bad options that they or their best ad visors have had the opportunity to learn from the crisis of 2000, the Asian economic meltdown and several other economic learning situations.

  247. 247 Bill Kerr

    David Harvey’s Organising for the anti-capitalist transition was an interesting but in the end a quite disappointing article. Worth a read for both the good and bad ideas.

    Interesting, wothwhile:
    – his (a) to (f) analysis of the crisis
    a) assault on labour
    b) globalisation -> more competition –> lower non financial profits
    c) reallocation of industry, some deindustrialisation in traditional core regions
    d) didn’t understand
    e) pushing debt to limits
    f) ponzi like asset bubbles to increase effective demand

    Some worthwhile facts, eg. one third capital equipment in USA idle (2009), 17% real unemployment

    real problems for finding outlets for surplus capital, how will they find outlets for the needed $3 trillion needed to maintain minimal 3% growth by 2030?

    China may crash (over accumulation) but too early to tell

    East Asia becoming the new global epicentre of Capital

    There is no exit strategy for the crisis – “the less excess capital is destroyed now, the less room there will be for a revival…”

    the US state may have to guarantee up to $200 trillion in asset values, eg. Fannie and Freddie Mac as one example, $5 trillion, in trouble

    some progressive concepts have been adopted and are immune from assault – social security, national medical schemes

    He proposes a co-revolutionary theory as the way forward, (a) – (g) which I thought was worth discussing, he does attempt to put it into a dialectical framework

    role of NGOs analysed, good and bad

    calls for a new communist movement

    says that communism has already existed (surprising for a marxist scholar)

    Taliban reference vague but could be approving

    advocates zero growth for future, (most disappointing part)

    climate change movement is a positive example of how to do things

    wants to create a “steady state social order”

    approves Bolivarian movements in Latin America (probably bad but I don’t know much about it so couldn’t argue against myself)

    some sort of grab bag united front at end consisting of everything “progressive”

  248. 248 Bill Kerr

    At Steve Keen’s blog I raised the issue of no marxists being nominated for the Revere Award of the best predictors of the crisis. There has been some uptake in the comments (5, 7, 28, 31, 34). The award has become controversial based on who has missed out from the short list (marxists, austrians, Nassim Taleb). As someone pointed out the Nobel Prize in economics has become totally corrupted since it turned into mainly a way to promote the latest neo-classical guru. Nevertheless, worthwhile to look at some of the work of those who predicted the crisis IMO.

  249. 249 Arthur

    Thanks for the links BilI. Such pointers are very useful. Sorry I’m not contributing myself at present. I”ve only skimmed Steve Keen’s post and read the specific comment #s you listed.

    Broadly agree with #28 and that sad reality regarding absence of Marxist economics being of central importance. I did find Rosodolsky quite impressive but his work too was a long time ago.

    Haven’t looked at the Harvey link yet. Very puzzling combination of openly reactionary advocacy of “zero growth” and “steady state” with glimmerings of Marxism and siding with the people against oppression. That reactionary stuff has in fact become dominant as “the left”. A concentrated exposition is provided by Magdoff and John Foster in Monthly Review. Detailed understanding and comprehensive refutations of that outlook might be the most useful contribution we could make at present. Traces back to classical refutations of reactionary romanticism and Narodnik populism.

    On the other side, explicit rejection of the “zero growth” and “steady state” stuff, also with glimmerings of Marxism seems to be championed mainly from revisionists including social-fascist remnants. So refuting both at once would solve all central theoretical problems! 😉

  250. 250 Bill Kerr

    I still think David Harvey’s Limits to Capital is an extremely useful guide, in parts, to understanding Marx, (which accounts for much of my disappointment)

    if you are still working on the economic maths then these morishima references might be of interest if you haven’t already seen them:
    (see footnote 7 on page 305 of Harvey’s Limits to Capital)

  251. 251 Arthur

    Tnanks. I have Morishma’s “The Economic Theory of Modern Society”, “Walras’ Economics” and “Marx’s Economics”. Not recommended.

  252. 252 Bill Kerr

    Developments in Greece (and PIGS) would seem to indicate that:
    1) Capitalism has learnt from previous crises how to plug some holes in the sinking ship (eg. stabilise the US banks) but then other holes appear, eg. failures of the economies of whole countries, it’s hard to plug them all
    2) that while the debt to GDP ratio indicator does not provide the full picture of what is happening it is still rather helpful – according to a Kasama article:

    Greece’s national debt of 300 billion euros ($394 billion) is bigger than the country’s economy, and some estimates predict it will reach 120 percent of gross domestic product in 2010
    Surrounded by Austerity

  253. 253 Bill Kerr

    Roubini: Greece debt crisis is only the tip of the iceberg
    After analysing the Greece issue Roubini points out that the political gridlock in Washington will make the situation worse, that the chickens will come home to roost:

    What worries me most is the political gridlock in Washington. While everyone agrees that $10 trillion deficits (by the Obama administration’s own estimates) for the next decade are not sustainable, there is no political will to act. The two parties are completely divided. Effectively, the Republicans are against any form of revenue increases. The Democrats are against spending cuts, especially of entitlements

  254. 254 steve owens

    Bill I don’t think that the Greek crisis tells us much about Capitalism. Its more a story about corruption and stupidity maybe you think the words are interchangeable. The corruption was in Greece entering the EU monetary union and the stupidity was in Greece entering the monetary union thereby giving away their ability to manage their currency. As to gridlock you must have a different definition to mine. I see gridlock when the Presidency belongs to one party and the congress belongs to another and the President veto’s lots of bills. Currently both houses have large Democrat majorities and the President is also a democrat. I cant see the gridlock what bills have been vetoed?

  255. 255 Bill Kerr

    My general thesis that you only write in order to contradict and not to develop or argue a coherent position of your own is confirmed by your response.

    The situation in other European countries is not as bad as Greece but they are comparable. In the eurozone: portugal, spain, ireland, italy, greece. Not in the eurozone: UK. That that issue is confined to Greece as you suggest is about as likely as PIIGS flying. Scroll down for the graph How country debts and budget deficits compare on this Q&A

    btw David Harvey has made the point repeatedly in his recent talks that the biggest failed state in the world currently is California

    Gridlock was Roubini’s word. I did quote it but was hoping that reader’s would follow the link and discuss the overall meaning of what he was saying rather than focus on a single word. Please read the other paragraphs and argue with that.

    Posner’s article comparing aspects of the Greek and US economies is worth reading. Since the culture in the US is so strongly against increasing taxation then the US deficit will continue to spiral.

    The US dollar may be strong enough to maintain that for a while but eventually something has to give. The point that Greece has reached now is the point that other economies are on the trajectory to reach in the future. Roubini and Posner are analysing in a similar way with Roubini articulating pessimism about the future more openly.

  256. 256 steve owens

    Bill if you read Roubini carefully you will notice that he states that there is a potential for gridlock.
    As to taxation there’s one certainty and that is that, in the USA there will be a significant tax increase this calendar year.

  257. 257 jim sharp

    bill & steve
    some useful stuff
    From the Gold Standard to the Floating
    Dollar Standard: An Appraisal in the
    Light of Marx’s Theory of Money

  258. 258 steve owens

    Jim that looks way past my theoretical level. Once people start talking about “therization” and “financialization” well gee.

    Bill whenever I look at the USA I think, there’s a system with loads of slack. Lets talk taxation Roubini talks of the Republicans aversion to raising tax when the real question seems to be making the rich pay any tax. For financial year 2009 Exxon payed zip in the USA while GE on $10 billion profit claimed a $1.1 Billion rebate.
    Roubini also states that the Democrats wont cut spending but all they have to do to cut spending is to stop fighting “unnecessary” wars or cut their missile programme in half and they could still target every major city in the world.
    Roubini does say that gridlock is a possibility, provided that the Republicans do well in the upcoming elections and provided that the Republicans continue to inhabit loopy land of “lower taxes and prosperity will follow” and provided that the Democrats remain hostile to any cuts in programmes.
    But these are big ifs, the tea party loones will actually weaken the Republicans in the upcomings and politics even (especially) in Washington is about give and take, those we will not budge an inch statements are purely for consumption of the folks back home.

  259. 259 steve owens

    Bill I’m at a loss with your assertion that I’m not developing a “coherent position” If you examine what I have written you will find the following.
    1 a position that credits Capitalism as being more resilient that many “Marxists” credit Capitalism as being.
    2 a position that is in agreement with Marx that Capitalism has a role in developing the world.
    3 a position that argues that Capitalism is still dynamically developing a world system.
    4 that Capitalism “Basic” exists in conjunction with non essential Capitalist developments ie monetary policy and corruption.
    5 An add on like monetary union is a case where its advantages in times off growth are now countered by its deficiencies in times recession.
    That’s my position it might not be a good position and I’m sure its not yours but it is a position.
    If I was in Greece my position would lead me to be with those on the streets I’m not sure that your position would lead you to be there also.

  260. 260 Bill Kerr

    > 1 a position that credits Capitalism as being more resilient that many “Marxists” credit Capitalism as being.

    I’m not sure who those “marxists” are currently (although that mistake has been made in the past), at any rate, in the real world it’s pretty much accepted that capitalism has been resilient, most people think that it’s communism that has failed

    > 2 a position that is in agreement with Marx that Capitalism has a role in developing the world.

    Agreed and also agreed that some do not think that Marx praised capitalism for developing the productive forces whilst simultaneously condemning capital for expropriation of labour. But it’s not a controversy on this site.

    > 3 a position that argues that Capitalism is still dynamically developing a world system.

    Agreed, but development is so uneven, flaky and fragile at the moment it’s not generally dynamic, you would have to cherry pick dynamic locations. The point is that it could be far more dynamic, the case for a better system could be made by someone who has done the necessary research to make it (not me unfortunately)

    > 4 that Capitalism “Basic” exists in conjunction with non essential Capitalist developments ie monetary policy and corruption.

    I think you mean manufacture still goes ahead despite capital going into the financial sector due to fictional profits there. True but you have to ask why an increased percentage has gone into finance in the recent period, it must be because the profits in manufacture are hard to find. Well, that might be worth clarifying further given your position that rate of profit is not falling. Noticed that Harvey said that too in one of his discussions, that rate of profit might fall but that it wasn’t a general tendency. I haven’t thought it through myself.

    > 5 An add on like monetary union is a case where its advantages in times off growth are now countered by its deficiencies in times recession.

    Don’t understand you here, so you might want to clarify

    There is so much happening and so much to learn. Unfortunately, I neglected reading Capital and the “hard Marx” so now have to try to catch up not only on reading and understanding Marx but various other schools of thought as well.

    My working hypothesis is that as the crisis is patched up by stimulus and bailouts (as is now happening in Greece, more moral hazard, same old “solution”) and debt becomes bigger and bigger that this is not sustainable in the longer term and a bigger crash, perhaps another depression, has to happen sooner or later, but that it’s foolish to predict a timeline. Capitalism is fragile but the future is uncertain. What we both have in common is not much a position.

  261. 261 Bill Kerr

    The future of public debt: prospects and implications (pdf 26pp)
    BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank

    Our examination of the future of public debt leads us to several important conclusions. First, fiscal problems confronting industrial economies are bigger than suggested by official debt figures that show the implications of the financial crisis and recession for fiscal balances. As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population. The related unfunded liabilities are large and growing, and should be a central part of today’s long-term fiscal planning.

    It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far. In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult. But, unless action is taken to place fiscal policy on a sustainable footing, these costs could easily rise sharply and suddenly.

    Second, large public debts have significant financial and real consequences. The recent sharp rise in risk premia on long-term bonds issued by several industrial countries suggests that markets no longer consider sovereign debt low-risk. The limited evidence we have suggests default risk premia move up with debt levels and down with the revenue share of GDP as well as the availability of private saving. Countries with a relatively weak fiscal system and a high degree of dependence on foreign investors to finance their deficits generally face larger spreads on their debts. This market differentiation is a positive feature of the financial system, but it could force governments with weak fiscal systems to return to fiscal rectitude sooner than they might like or hope.

    Third, we note the risk that persistently high levels of public debt will drive down capital accumulation, productivity growth and long-term potential growth. Although we do not provide direct evidence of this, a recent study suggests that there may be non-linear effects of public debt on growth, with adverse output effects tending to rise as the debt/GDP ratio approaches the 100% limit (Reinhart and Rogoff (2009b)).

    ie. some bankers are saying that the end of the world is nigh

  262. 262 steve owens

    The Bank of International Settlements and who said the Third Reich gave us nothing.
    Firstly Bill this link doesn’t say that the end of the world is nigh its saying that debt may curb growth.
    Secondly Bill what does it mean “….the debt/GDP ratio approaches the 100% limit.” There’s no such limit debt to GDP can and does go beyond 100%
    Bill what action follows from your position? What would you recommend our Greek friends do? Should they join the protests or is this just falling in behind the pseudo left.
    The only reason to develop a position is so that we can inform our actions, what actions flow from your position?

  263. 263 Barry

    More to the point, Steve: what are the Greek ‘Left’ advocating? I checked out the Greek CP website and couldn’t find any practical platform but lots of anger directed at the ruling Socialist Party. What is the nature of the crisis? And what is to be done? If the Greek Left can’t come up with good answers to these questions, then the current response in the streets will just be little more than an expression of anger, sustained until the mass of participants grow weary with it, with anarchists doing some real harm (eg, killing bank workers) in the meantime. Or, the situation will be created where a populist, anti-democratic, Right will gain much strength.

    Let me be clear: I’m not against the demonstrations. But it seems to be the problem everywhere. Leadership and analysis (understanding what’s happening) needed!

    (If Bill has good answers then I’m sure he’ll let any comrades in Greece know). 🙂

  264. 264 tomb

    thanks for the link. think they hit on one thing that interests me briefly, at what point do they/must they ditch the stimulus measures as monetary policy is out of their control and public debt becomes junk bonds such as now appears to be the case facing Spain and Greece. Assume it will be a situation where things move too fast for any stimulus to work anyway and the cost beyond them in the short term at least. Giving guarantees is one thing honoring them is another

  265. 265 steve owens

    Even more to the point Barry, what we are seeing in Greece is class struggle just like we see here in Australia some times quite some times loud.
    Right now the Greek government is saying the system is in crisis and the working people must pay, less wages,longer hours, more taxes, less social services and a smashing of any worker representative body that stands in the way ie trade unions.
    Now the Greek workers have a choice lie down say its all too hard the slogans are wrong, people will loose interest and melt away, or they can fight back stike, demonstrate, occupy. One day of factory occupation is worth a year of internet discussions.
    Greece is no different to Australia.
    But on the other hand Barry if youve checked the Greek CP website and found nothing usefull I guess theres no point is there?

  266. 266 barry

    Steve, you’ve got me wrong if you think I ever believe “there’s no point”!

    As for “one day of factory occupation” being “worth a year of internet discussions”, I’d say it depends on the quality of the internet discussions.

    Which brings me back to the point I made: the important need in a crisis is to understand what’s happening and then to develop a platform or series of proposals that make sense, have a practical edge, can build or lead a movement, while also having a long-term objective to challenge capitalism.

    I checked the Greek CP website because it seems to be playing an active role in the demonstrations over there; yet I’m left wondering what it is they’re actually advocating, rather than just showing how angry they are.

    Yes, we can agree that the ssytem is in crisis but…

  267. 267 Bill Kerr

    Ken Rogoff, former IMF Chief Economist on the one trillion eurozone bailout package (full text and audio here):

    KEN ROGOFF: The package is unprecedented in its size and it is intended to provide a backstop, not just for Greece, which is immediately in trouble and it’s already had a bail out, but for Portugal, Spain and Ireland. They’re trying to send a message to markets that we’re going to stand by all government debt in Europe. It’s not just the trillion dollar package, in fact that might not even be the most important part. The European Central Bank, Europe’s Central Bank, has agreed to start taking on all kinds of government debt, bank debt that it wouldn’t have dreamed of and at a scale that it wouldn’t have dreamed of earlier given this political backing. Last, but not least, the Europeans are telling financial firms you bet against us, and we’ll regulate you into the Stone Age.

    WERMAN: So will one trillion dollars send the message that the EU and the IMF won’t let the same thing happen to Portugal, Spain and Ireland that happened to Greece? Or is it just kind of economic suicide?

    ROGOFF: Well it’s a very risky move, both for Europe and the European Central Bank. I would say they clearly kicked the can down the road a year or two, but they haven’t solved the fundamental problems. They haven’t got the rot out of the system. The governments in Europe are running big deficits, there’s very slow growth in the southern countries recession, and they need to solve their problems.

    WERMAN: How do you get at those fundamental problems that rot at the heart of these European governments as you call it?

    ROGOFF: Frankly, I think the ideal package would have been to allow a couple countries to default, to discipline others, put them on sabbatical from the Euro and then draw this ring fence around the rest. Instead, they’re trying to prevent anyone from going down, feeling that’s essential for political unity. But it’s tough. The scale of how much Greece has to cut back on its deficit is staggering. Frankly, even if they didn’t have to pay their old debts, they’re having trouble living within their means and not borrowing new money. That’s really the problem. That’s a problem across Europe. So it’s a huge challenge. Is it impossible? No. I’d make an analogy to an overweight person who needed to lose 80 pounds and instead of having to do it in a year, this bail out lets them do it in four years, but it’s still very, very tough.

    WERMAN: Was that really ever an option, though, to let Greece default on its debt to kind of teach other countries a lesson?

    ROGOFF: Not only was it ever really and option, I suspect it’s still more likely than not that it’s going to happen. They want to postpone it to where their economies are growing more quickly. The governments say we’re not going to allow it, but they always say that. It’s in a very difficult bind.

  268. 268 Bill Kerr


    Broadly agree with #28 and that sad reality regarding absence of Marxist economics being of central importance. I did find Rosodolsky quite impressive but his work too was a long time ago

    Ben Fine has some interesting material on value theory and the separation of history of economics. He is still active.

  269. 269 Arthur

    tnx. I have Ben Fine “The Value Dimension” and will put it aside to have a proper look. The more recent work looks interesting too. Unfortunately I haven’t been able to do much on economics for a quite while.

  270. 270 Bill Kerr

    I’ve been reading some of the Ben Fine papers, you have to scroll down to obtain his available unpublished papers, the published ones at the top are copyrighted. This one is interesting: Financialisation, Poverty, and Marxist Political Economy (pdf download) for its insights into value theory, poverty and financialisation of the economy. Also Looking at the crisis through Marx for his analysis of the crisis and neoliberalism. Also The Historical Logic of Economics Imperialism and Meeting the Challenges of Contemporary Orthodoxy: Or Twelve Hypotheses on Economics, and What is to Be Done for a critique of orthodox economics and what could be done about it. You would think it would be possible in the current climate to mount a campaign to change the way economics is taught in universities, a reform that might lead to more than reform.

    Not sure how Fine’s analysis which emphasises financialisation contrasts with arthur’s emphasis on overproduction but would be interested in the thoughts of others here. Actually I haven’t seen a coherent description of financialisation before this one and he links to his non marxist sources as well. Irrespective at this stage I find Fine quite helpful with regard to bringing the analysis of marx into the 21st Century. Some of his passages are amusing as well as analytical. I liked this one:

    “… in commodity markets, we have futures trading at its most bizarre with carbon offsets. Commodity fetishism has surely arrived at perfection when we can buy and sell in a market for not producing something in the future (especially when, in fact, carbon trading is
    about allowing that undesirable carbon to be produced for you by someone else as well as yourself on the grounds that they might produce less of it than you would if you were producing what they produce as well as what you yourself will carry on producing)”

    which might suggest that he has a better policy than David Harvey on the reason for a revolution, with Harvey one of the goals is to attain a zero growth economy (despite this I still find much of Harvey useful too).

  271. 271 steve owens

    Bill is the term “financialisation” that your using any different from Lenin’s writing on Finance Capital? (in his book Imperialism the Highest Stage of Capitalism). In his book Lenin covers the central role that banks have taken within Capitalism their high profit rate in good times and their role in expanding monopoly during bad times.
    He even covers the now familiar “balance sheet jugglery”
    Maybe “financialisation” is something new, if so could you please explain what new insight it brings.

  272. 272 Arthur

    Thanks! I read the first Ben Fine paper and most of the second but only skimmed the third as find him heavy going without shedding much light.

    The diagram at end of first paper, explained on page 2, looks worth understanding. I’ll have to get back to it.

    But from what I did get of it, the diagram only shows circulation of money (alongside exchange and production) and cannot shed any light on finance. Not even coordination of different turnover periods or centralization let alone risk spread, allocation of investments, savings etc etc

    Need a better diagram and explanation to start from. Then one with separate corporations and investors and equities and bonds with dividends and interest.

    Also perhaps states, currencies and national debts to shed light on “finance capitalism” that emerged early 20th century. Only then could one start to describe anything different about more recent “financialization”.

    I liked Harvey’s explanation of rational aspects of rent and land prices. Require similar “real is rational” approach for finance.

    Ongoing socialization clearly transfers a large part of coordination etc from individual capitalists to “finance”. This is necessary and desirable (and makes expropriation easier).

    Ben Fine seems to view it as a negative result of neoliberal ideology rather than reflecting necessity.

    Also misses the point that unproductive investments reflect overproduction. Seems to blame it on the financial instruments used for it. Casuality runs the other way.

  273. 273 Bill Kerr


    I was mainly trying to encourage some reading of Fine. Many years since I’ve read Lenin’s Imperialism. David Harvey does have a discussion of Finance Capital and its Contradictions in Chapter 10 of Limits to Capital which I need to reread and contrast with Fine’s view. Harvey is critical of Lenin’s view of finance, which apparently originated from Hilferding.

  274. 274 Bill Kerr

    It is puzzling that Ben Fine doesn’t mention overproduction as an alternative analysis. I unsuccessfully googled for clarification.

    But by my reading he is saying that neoliberalism is a confused terminology that ought to be replaced by financialisation, not the other way around. He does say that financialisation is necessary for capitalism but heightens the probability of crisis. His point 6 on financialisation includes:

    More generally, as emphasised by Marx himself, the financial system can be extraordinarily powerful in mobilising and allocating finance for the purpose of real investment. But, by the same token, it can both trigger and amplify monumental crises.

  275. 275 Bill Kerr

    I bought Ben Fine and Dimitris Milonakis’s From Political Economy to Economics and have just read section 4-4 which explains marx on value. It’s the best short explanation on value that I have seen so far. Although only partially read so far the whole book looks good because of its emphasis on method and history. In fact that is the argument about value, that to understand the concept requires history and dialectical method, otherwise you get locked into the ricardian or simplified marx view that value is added labour and how it connects to social relations gets left out. This seems to be one way in which “marxists” have misunderstood marx and those misunderstandings have often been passed down the generations.

    btw for those buying books The Book Depository has free delivery and prompt service, cheaper and quicker than amazon.

  276. 276 Bill Kerr

    I wrote a summary (michael perelman’s analysis of the economic crisis) of a recent video presentation by michael perelman. He outlines 6 possible responses by companies to the inherent tendency of the capitalist economy towards a deflationary spiral (aka tendency towards a falling rate of profit). He says that:

    “intense competition is equivalent to a depression, yet most economists believe that competition is good and depressions are bad”

  277. 277 Bill Kerr

    The Enigma of Capital and the Crisis this Time

    This has an interesting section about half way down on “THE UNEVEN GEOGRAPHICAL DEVELOPMENT OF THE CRISIS” where he analyses the trajectory of the current crisis in the USA and China in particular and also a little about other parts of the world.

    I have an instinctive reaction against his final section “THE LEFT ALTERNATIVE”, it has a woolly utopian feel to it, but do have a lot of time for Harvey’s analysis of Capital (the book) and capitalism as distinct from his framing of a solution.

  278. 278 steve owens

    Hi Bill
    In the latest edition of the Eureka Report, Robert Gottliebsen writes that some big time US institutional short sellers came to Australia recently to run a ruler over the Australian housing market with the view of making a killing out of shortening here (a strategy that made them buckets in the US)
    The result was that they went else where looking for easier pickings.
    This supports my earlier argument that the Australian housing market will fall in the face of rising unemployment but not because the current numbers seem large. There are still plenty of pundits who claim that real estate in Australia is over valued but with strong employment numbers, strong immigration numbers and a sound banking system I expect prices to stay high until something changes in another part of the economy.

  279. 279 tom

    Had a look at “The Enigma of Capital and the Crisis this Time” Bill.

    Seems to give lip service to marx and either attributes crisis to invisible (hand) out of control financiers or globalisation. Looks at correlations between events and crisis and rather than a result of the crisis attributes the crisis to these events.

    Would appear reforms to financial system would mean no more crisis. Not sure what the 3% growth actually means (besides unemployment and slow growth) but doubt it is crucial to financial crisis but rather a result of.

    Also not sure why moving from production to Hi-tech could have anything to do with crisis either. The movement in share of wages seems more relevant but think the post ’70’s may not have been an attack on wages more increased productivity which workers did not get an equal share of.

    Don’t understand excessive innovation remark any more than I understand overheating. Would have thought it was pretty obvious why capital moved away from production even more so now.

    Blaming deregulation for speculation and speculation for the crisis seems a bit shallow

    (Think I need to look at diminishing returns and and the falling rate of profit to get a perspective here)

    doubt if labour discipline has anything to do with financial crisis either, Would affect profits and may cause economic setbacks etc but not a system fault.

    demand has little to do with wants more with needs I would have thought

    Also not sure why the surprise the crisis seemed to start in london and new york, If it didn’t happen there then it wouldn’t be a world crisis but rather a local crisis such as the asia crisis etc. Seems simplistic to claim it all started in 2007.

    Do not share his optimism for Asia and looking ominous for china at the minute. would have thought it impossible for Asia to thrive while the rest of the world crashes.

    Not surprising that stimulus packages slow a slowdown in growth but surprising that after they either stabilised or had seemingly had little effect one would advocate increasing them given the long term detrimental effects.

  280. 280 steve owens

    Tom you say “….would have thought it impossible for Asia to thrive while the rest of the world crashes.” Really, the rest of the world outside Asia has crashed? Don’t tell that to the Indians or the Brazilians or for that matter the Australians. Gee the US came out of recession over a year ago.
    Some of the world has crashed ie Iceland, Spain, Ireland and Greece but most of the world is restructuring and developing Capitalisms that are leaner and meaner and off and running again just like Capitalism has done time and time again.

  281. 281 tomb

    read the article if you want to talk about it steve

  282. 282 Bill Kerr

    hi tom,

    Thanks for comments.

    I take it that your idea of marx’s crisis analysis is overproduction and that your disagreement with Harvey is that he talks about a variety of causes, some of which you disagree with. It isn’t that Harvey isn’t aware of overproduction or over accumulation. A theory of various blockage points to the circulation of capital is just another way of saying over accumulation. In his book “Limits to Capital” he progressively introduces three versions of crisis theory:
    1) Over accumulation and devaluation of capital (Ch. 7)
    2) The relation b/w production, money and finance (Ch 10)
    3) Geographic aspects, moving the crisis around (Ch 13)

    If you read the current article from the background of this layered approach you might see it differently or at least not see him as a marxist ignoramus, which a few of your remarks imply.

    Which is the superior analysis: Harvey’s layered approach or a one key issue approach (overproduction)?

    Responding to some of your specific points:

    The reason he says that capitalism needs a 3% growth rate is:

    “Tomorrow’s growth creates the effective demand for yesterday’s expanded product. The effective demand problem today is thereby converted into a problem of finding profitable new investment opportunities tomorrow. This explains why compound growth is so essential to the perpetuation of capitalism”

    Excessive competition, innovation can cause crisis because of “rendering production systems obsolete well before investments have been amortized”. Perelman makes a similar analysis:

    “I show that intense competition is equivalent to a depression, yet most economists believe that competition is good and depressions are bad.”

    You say:

    “… the post ’70’s may not have been an attack on wages more increased productivity which workers did not get an equal share of”

    Given the advent of Reagan and Thatcher’s (Hayek’s) policies, offshoring and the decline of the strength of unions then real wages did come under attack and declined relative to GDP. Harvey identifies this as the primary blockage that needed to be overcome by capital in the early 70s and the policies adopted and outcomes achieved, eg. decline of union strength, would seem to confirm that.

    I think the current trend is America in decline and East Asia on the rise but whether that continues is problematic, so that’s a fair point.

  283. 283 steve owens

    Hi Tom
    Ive given the article a second go but need to point out that you posted nothing positive about it. I thought that the only new idea in it that I haven’t come across before was the idea that Capitalism needs 3% growth to maintain itself. Luckily for Capitalism the UN in May of 2010 estimated that world growth would be 3% in 2010 and 3.2% in 2011.
    But my post wasn’t about the Enigma of Capital article but about your comment that the rest of the world minus Asia was crashing.
    Stuff I do find interesting is the interview of Stiglitz on Bloomberg 2 nights ago where he points out that the biggest problem in the USA is high unemployment because high unemployment will deskill the workforce. Stiglitz argues that the he knows of many infrastructure projects that would return 5%, that the US government can borrow money at between 0 and 2%. Clearly here’s an argument by a leading economist for massive economic stimulation that will reduce unemployment and turn a modest profit yet the Democrats in power at every federal level can’t bring themselves to do the bleeding obvious.
    In these times austerity thinking is poison and its cure is stimulus. Luckily for the Chinese they have the cash for stimulus and the will. In the USA sound economic policy has to receive bi partisan support. Good luck with that.
    On another matter I was disappointed that Peter Schiff was knocked out of the political race but he was up against a lady with wrestling connections, really he never stood a chance.

  284. 284 steve owens

    Bill the hallmark of a crisis of overproduction is that commodities start being sold for below their cost of production (something that did happen to US houses) as producers start to say get any money back that you can. Clearly if I can’t buy a Harely for below its cost of production and I can’t, there is by definition no crisis of over production except in US housing which I don’t want.
    Theres an interesting article in the Economist about why India’s growth rate will overtake China’s. You got to love the world right now as India drags 60 million people out of poverty. I say if this is a crisis give us more.
    Just on China overtaking the US, I will take some notice when someone explains why Japan didn’t.

  285. 285 Bill Kerr

    There isn’t a formula or standard definition, that’s the implication of Harvey’s analysis. Your response to my report of his analysis is to come up with a formulaic definition of overproduction. The next depression won’t be a mechanical rerun of the previous one since the world has changed in many ways – and not changed in many ways – since then. Hence the need for at least some new analysis

    You need to discuss Harvey on his merits but since you see almost nothing new in his analysis then there’s nothing new to discuss, is there

  286. 286 steve owens

    We can take it point by point if you like.
    Harvey “Capital, Marx insists, is a process of circulation not a thing”
    I think that Harvey oversimplifies Marx as I think Marx had many views as to what constituted Capital. Ive always preferred the idea that Marx viewed Capital as a relationship between classes rather than a thing.
    Marx wrote a formula for Capital this being C’=c+v+s
    now c is constant capital and v is variable capital which means that Marx saw lots of capital rather than just “a process of circulation”.

  287. 287 steve owens

    Further more Harvey argues that 3% growth over time has happened but is unsustainable. I see no reason why Capitalism wont continue to expand over time, as I pointed out world growth currently stands at 3% despite the power house USA only registering about 1% and Japan not reaching 3% in any of the last 10 years. Harvey considers 911 and the Lehman collapse to be life threatening whereas I consider them to be blips rather than life and death problems for the system.
    Harvey states that Marx’s analysis of the assemblage of initial Capital was “inadequate” but I think that Harvey confuses primitive accumulation with capital concentration.
    Harvey talks about the crucial role of the suburban boom in the post war boom but you could just as easily say that the post war boom was crucial to the suburban boom.
    Then there’s “Excessive power within the financial system can in itself become a problem…..” Lenin and several US Presidents said exactly the same thing oh about 100 years ago.
    It’s getting late so Ill stop with just one more. “Wall Street finance connived at the deindustrialisation of the US after mid 70’s”. One the US has not deindustrialised theres still plenty of machines made in America and Two its conspiratorial to believe that finance Capital “connives” rather than just makes rational investment decisions.

  288. 288 steve owens

    OK Bill a question. When you read Harvey and he says that after the 70’s the US was deindustrialized what do you think? Now you must know that the USA is still the largest maker of industrial commodities on the planet and that it manufactures more commodities than China, India and Brazil combined.
    So what do you think?
    OK so the US has had some industry relocate offshore but that’s a process almost as old as Capitalism itself. Ok industries relocate but do financiers connive at this? Really?

  289. 289 Bill Kerr

    Marx’s words, from volume 2, Ch 4 were “Capital … can be understood only as a motion, not as a thing at rest” so Harvey has made a slight deviation but is correct to emphasise the dynamic aspect of capital as motion rather than static

    What I think Harvey means by his deindustrialization comments is that after 1975 manufacture in the US provided declining dynamism to the US economy. He’s making an argument of finance capital increasing in influence relative to industrial capital. I would expect that his book, The Enigma of Capital, which I haven’t read, would provide more detail than his abbreviated talk. Brenner makes a similar argument in his books about the long downturn and provides figures and tables to back it up.

  290. 290 steve owens

    Bill people do talk about deindustrialization in the US but the fact remains that the US is the number one country for industrial production.
    What I think most people are referring to when they say deindustrialization is the process of free trade and trade liberalisation that Bill Clinton gave a big push to with the NAFTA agreements.
    One of the results of trade liberalisation was that a lot of low tech industries relocated to China and Mexico and Vietnam ect ect.
    When people object to deindustrialization what they mean in effect is that they object to the growth of Capitalism on a global basis and want a return to the time when Flint Michigan was the low tech Mecca.
    Usually its right wing Americans that object to what clearly is progress. How more unfortunate is it when left wing academics talk about how finance Capital has connived in this “retrograde” process.

  291. 291 Bill Kerr

    Steve, In your last para you are trying to turn the descriptive part of his analysis of the relative influence of manufacturing and finance capital into a morality play by interjecting the word “retrograde”, which is not used by Harvey. My interpretation of his use of the word “connived” is that different sections of capital are in competition and this usually plays out behind the scenes.

    I just put the Harvey analysis up for discussion because clearly finance played an important role in this crisis and it has to be integrated into the analysis. I’m not happy with an analysis that only focuses on the underlying fundamentals of overproduction, over accumulation etc. I don’t know enough to say that Harvey is mainly correct in his analysis but I do think it’s worthy of a proper discussion. Neither you nor Tom have attempted that yet IMO but are just nitpicking for negatives, I’m not really sure why. Unfortunately, I can’t contribute anything original of my own. I’m still studying Marx but my study is still at an earlier stage (mainly on value and its critics) to allow me to contribute anything original to the current crisis.

    I may ignore further comments here that don’t attempt to engage in the substance of Harvey’s arguments. The comments here have only been helpful in getting me to reread and think about Harvey’s paper but since you both assume he is a marxist ignoramus and take that stance in your criticisms then they haven’t been helpful beyond that.

  292. 292 steve owens

    Bill Ive argued with Marxists who have been saying that Capitalism has been in crisis since the mid 1970s. Ive pointed out that 3 decades of crisis would constitute a permanent crisis and that Marx argued against the idea of a permanent crisis.
    Marxists have argued that the crisis is one of systematic inability for the system to get an adequate return on profit already generated. I have argued that its a strange system that generates profits but can’t find a profitable spot to reinvest. Particularly when investment could go into the BRIC countries quite profitably.
    I agree with Harvey that the crisis was mainly in the financial sector and there was a housing bubble that the US government encouraged. It was a government induced crisis in many ways.
    BTW I think housing bubbles are a good thing. Run the thing through. There’s a speculative boom in housing, result prices go up houses get built then prices go down. With a few exceptions those houses are then used. I would prefer a government programme to provide cheap housing but in the absence of that the market works pretty well.
    BTW Australia does qualify for a housing bubble but it has weathered the GFC and 5 or 6 interest hikes so I guess it’s pretty resilient. Robert Gottliebsen wrote a few days ago that the 4 major banks are restricting financing for new houses so as to restrict the supply and put the day of reckoning off a bit further. I say let the day come and then we can enjoy cheap housing although getting the finance wont be so easy as it is now.

  293. 293 steve owens

    A good recent quote from the US President about the plight of America.
    “A great industrial nation is controlled by it’s system of credit….. all our activities are in the hands of a few men. We have come to be one of the worse ruled one of the most completely controlled and dominated governments in the civilised world.”
    US President Woodrow Wilson 1916

  294. 294 Bill Kerr

    Whenever I visit the following site it strikes me as one which has to be read for its analysis of the current crisis from a perspective based on a deep study of marx. The most recent article compares Keynes to Marx. But the whole site seems very relevant to me.
    A Critique of Crisis Theory

  295. 295 tomb

    Bill, hadn’t put him as a marxist ignoramus but rather that what I was reading seemed to run counter to marxist theory and if he was going to mention Marx then maybe he should say why he disagrees.

    A layered approach or one keyed approach? I hadn’t suggested any approach but do not think a layered approach has any more merit than any other approach. I am interested in the answer and don’t care if it is layered or not.

    My implication was that the theory may be suss as what it presents seems to me to be wrong.

    The 3% growth has been put forward over the years as the means to static growth. That is to keep up with population growth you need 3% growth. I fail to see any intrinsic value in 3% other than this and assume he means 3% real growth. Seems like a religious position not based in reality. will need to read it again but am only online intermitently at the minute. Capitalism has grown at different rates negative included and it is still here. Some countries grow faster than others so can’t see the relevance of 3%

    This is not nitpicking but some flaws in the theory.

    Don’t know what excessive competition is either makes no sense. either it is competitive or it isn’t. The suggestion is that capitalism is improving production too quickly and should be slowed down. We should keep old methods and not introduce new ones. Capital normally moves from unprofitable to profitable enterprises and industries. If this is not happening then that is the problem not competition. This seems the theme through the article, there is no fundamental crisis just some flaws in capitalism.

    I agree that capitalism has developed but disagree that it has changed. Capitalism is fundamentally the same and the theory is the same, the details may be slightly different.

    Assume Unions decline is because they are irrelevant so clearly workers didn’t think unions could do anything about lost wages or as I said productivity went up and wages went up but as a percentage not as much as profits so workers didn’t really notice the change. I need to have a look at the figures to see if profits grew faster than wages but have no recollection of wages being cut Real wages declining need to look at that also.

    The offshore strategy is not new and has meant china and other developing countries do the low skilled work while developed countries do the Hi Tech high paid work. Seems to run counter to the argument. Also to oppose the direction developed countries have taken away from productions seems strange. Capitalism isn’t based purely on the manufacturing industry. Developed countries have done well to shed the manufacturing industries and why anyone would want to keep them is beyond me. Again seems a problem with theory.

    Thanks for the article Bill and will look at the link you just gave.

  296. 296 Bill Kerr

    oops, I have been premature with the new link, in terms of my praise for “deep study of marx”. His general political line is conventional “progressive” (pseudo-left position on Iraq war and Afghanistan) – as revealed in his Keynes-Marx article. I was more impressed by the methodical coverage of crisis theory but must admit I haven’t looked closely at his articles yet. As I said earlier I have been preoccupied with value theory.

  297. 297 Arthur

    Thanks for link to blog on Critique of Crisis theory. So far I have only read “About Me” and “The Problem: Marx Didn’t Leave Us a Completed Crisis Theory”, but they and the sidebar list of categories certainly look as though his whole collection would be essential reading.

    I wouldn’t worry too much about the general political line being wrong. To some extent these issues are orthogonal to each other (eg pro-Soviet “Marxists” often had more interest in and understanding of political economy than revolutionaries did – as indeed seems to be true more widely ie the more left wing the less grasp of political economy 😉

  298. 298 Bill Kerr

    wrt helpful political economists who deviate from perceived correctness I have found Isaak Rubin Essays on Value to be extremely helpful in understanding the social form of value, eg. ch 12 is very clear in spelling out the content, magnitude and form of value

    It took me a few rereadings of Rubin and chapter one of Capital before I felt I had grasped the sentence which concludes, “… material relations between persons and social relations between things” on which many understandings and misunderstandings of Marx rests

    The best contemporary explanation of value theory I have found so far is The Value of Marx by Alfredo Saad-Filho, (full text pdf) which includes articulate criticism of Rubin and other misinterpretations (chapter 2). I learnt new things about himat and dimat (historical and dialectical materialism) from chapter one of Saad-Filho, and more.

  299. 299 Bill Kerr

    John Weeks (link) also has a chapter on the current crisis in his draft book Capital, Exploitation and Economic Crises. If you send him an email then he will send you a copy of the draft.

  300. 300 Bill Kerr

    The Enigma of Capital (book at amazon)
    The amazon look inside feature has a search field as well as contents and other pages. By typing “3 per cent” into the search field you can see more details of Harvey’s argument without buying the book.

    Also in this recent video talk (marx’s method) Harvey explains his methodological approach to Marx as a preamble to what is mainly another version of his “enigma” approach. In brief he is saying that marx’s analysis of production is general and law like across 150 years but that distribution, exchange and consumption are more particular, less law like and not predictable (@ 6minutes). He also jokes that people who have read volume one and think they grasp marx miss some vital aspects in volume three etc. where he integrates the analysis.

    Not in a position yet to respond in more detail to Tom’s specific points but it seems clear to me that he is not throwing out marxist fundamentals, that it is more an attempt to retain fundamentals and update the things that change.

  301. 301 steve owens

    Bill firstly thanks for linking to A Critique of Crisis Theory.
    Secondly if you scroll down to the “Two families of Marxist crisis theory” you will see him describe what I think Ive been arguing against. I don’t subscribe to the underconsumptionist view but the view that Ive been taking issue with (and that gets expressed at this site) is “the camp that stresses the problems of producing surplus value” This is the camp that states that the crisis comes about because the surpluses can’t be reinvested profitably despite the presence (in my view) of heaps of profitable opportunities in the developing world.
    To me it’s the Marxist vision that uninvestable surpluses seek out opportunity in the less developed world thereby leading to world development. This is happening despite the very un Marxist (read un Leninist) view whereby significant amounts of realised Capital in the form of money is flowing up from China to the USA rather than down from the USA to China.

  302. 302 steve owens

    I must confess. About a year ago I argued with Arthur. I said inflation he said deflation. For a while we had some deflation but then the Fed came to my rescue and inflation was restored. However Arthur’s deflation has once again raised its ugly head. Luckily for me QE2 is on the way and my inflation prediction may hold up.
    BTW Japan is currently on QE22 and their economy still stagnates.
    I understand that Japans original sin was to loose a currency war with the US in 1985, just hope China was watching and learning.

  303. 303 steve owens

    Ok one more try. The Global Economic Crisis was not a crisis of Capitalism but a crisis of government stupidity. The whole US housing bubble was created by US government stupidity. From the repeal of the Glass-Steagall Act to the Fed. holding interest rates down to minimal levels, to promoting private home ownership to poor people rather than building public housing. Plus those stupid mortgage laws that leave the bank with the debt rather than the borrower. (It grieves me to see the current wave of short selling of houses, poor banks. Short selling of houses being where the owner sells to a friend at a real low price sticking the bank with the bad debt. Illegal of course but the only real crime under Capitalism is getting caught).
    If the US government had not encouraged “hot” money into the US housing market that money may well have found it’s way into productive enterprises in countries where a profit can still be made. Third world countries like Australia.

  304. 304 Bill Kerr

    I haven’t studied this thoroughly yet but Kapitalism101 has an article on the LTRPF (law on the tendency of the rate of profit to fall), titled ironically “the tendency of the mass of crisis theory to rise“. At the start he categorises the various conflicting theories. David Harvey’s theory, discussed here earlier, is described as eclectic. I have broken up his paragraph and added subheadings:

    Uncoupled economy
    For the theorist of the uncoupled economy this crisis is not an inevitable crisis of capitalism, but an inevitable crisis of finance, inevitable given a specific set of financial institutions that evolved over the past 30 years.

    In the underconsumptionist thesis, this crisis is the inevitable result of capitalists winning the class war, of the depression of workers wages. But had the class war gone differently we can only assume, given this underconsumption argument, that we would not be in a crisis right now.

    Falling rate of profit
    For the falling rate of profit theorists this crisis is an inevitable expression of the basic contradictions of capitalism, contradictions which have always plagued capital and will always plague it regardless of the evolution of the credit system, the state of class struggle, the political realities of the time, etc. (Or at least that is what they argue.)

    And finally there are the eclectic theorists of multiple causes (David Harvey, Erik Olin Wright) who argue that, given the plurality of obstacles to accumulation, eventually one will cause a crisis

  305. 305 tomb

    for some unknown reason can no longer open the links Bill provided but found this interesting


  306. 306 steve owens

    Well in the spirit of owning one’s mistakes I’d like to submit this self criticism. Earlier in this thread I stated that the US would have a tax increase this year by the means of the expiry of the Bush tax cuts (run up a deficit and cut taxes, way to go George)
    Anyhow President Im trying to look like a Republican has decided to extend the tax cuts rather than reduce the deficit.

  307. 307 Bill Kerr

    Explaining Anemic U.S. Job Growth: The Role of Faltering U.S. Competitiveness
    (pdf, 15pp)

    And the solution is … be more competitive! Good for the US but screw the rest of the world.

    Useful article to indicate current mainstream thinking and how different “solutions” contradict each other (I haven’t read it fully yet, in a rush) but also shows that Unemployment and Revolution stands up quite well despite being written 30 years ago.

    But what is the right diagnosis? There is anything but consensus on this for at least seven diagnoses have been offered. The dominant ones are well known, having been debated almost daily in the media. For some, this is a “Keynesian” recession, albeit of unusually severe proportions. With demand flat, what is required is for government to use significant and sustained countercyclical fiscal and monetary policies to get people and businesses spending again. Others argue that “this time it’s different.” They argue this is a financial crisis-induced recession and as such that conventional Keynesian tools are of limited use and that recovery will inherently take much longer. But following the logical prescriptions—fiscal stimulus for the first, and cleaning up balance sheets for the second— will provide some relief for the patient, but not the needed cure. Still others argue that regulatory uncertainty is the culprit, that companies worry about vast new regulatory burdens and increased taxes and are hoarding their capital until this threat has passed. But in fact, few businesses actually appear to be worried about this

    A next three diagnoses are grounded in micro-level factors. The “skills mismatch” explanation holds that many more workers would be employed if they just possessed the right skills for current job openings. But while a contributing factor, it doesn’t explain why unemployment remains at around nine percent when it was under five percent just a few years ago. The “robots killed our jobs” explanation blames new technology for job loss, even though productivity is lower now since the recession began than previously and even though the economic literature is largely in agreement that productivity does not lead to net job loss. The innovation exhaustion explanation actually posits the opposite cause: too little innovation and productivity, holding that it is because the possibilities of technology-powered innovation have dried up, that recovery is so difficult. This is an appealing
    diagnosis, in part because it is closer than the other diagnoses. But it is still off the mark. The current IT-driven innovation system is alive and well. To the extent that this diagnosis
    is accurate, it has to do with where innovation is taking place which is not in the United States as much as it used to be. Unfortunately, the United States as a whole has become less innovative

    This gets us to the seventh, and in our view, most accurate and overlooked diagnosis for the anemic U.S. recovery: the failure of the United States to maintain its competitiveness in the world economy, particularly in manufacturing, means that the overall U.S. engine of growth is not running on all cylinders and that recovery is halting. It will only be when the United States regains the competitiveness of its internationally traded sectors that the U.S. economy will achieve escape velocity. If this is in fact the proper diagnosis of the problem,it leads to a fundamentally different set of policy solutions than the other, particularly Keynesian and fiscal crises, diagnoses suggest. This would mean that addressing the short-term and long-term U.S. economic challenges are in fact intertwined and require that the
    United States immediately put in place an aggressive program to restore U.S. innovation-based competitiveness including dramatically stepped up trade enforcement; corporate tax
    reform, including expanding incentives for producing in the United States and lowering the effective rate; and expanding investments in technology, manufacturing support, and export financing. Such a package, passed with bipartisan support would not only produce changes that would help the U.S. economy in the moderate and long-term, it would help send a clear message of confidence to businesses, entrepreneurs, and consumers that the
    future prospects of the U.S. economy are going to be strong.

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