Looking for an Exit from the Crisis
After writing the post about Michael Spence and his proposal for the advanced countries to pursue an export-led growth strategy as way out of the crisis, I became intrigued with looking at how mainstream economics thinks exit will happen. So I have been spending time trying to find the answer to this question.
A big part of the puzzle for labor theory in answering this question is the nature of the crisis itself: what is the crisis as seen through the eyes of bourgeois apologists? The crisis presents itself as a mass of under-utilized (idle) capital and a mass of underemployed (idled) workers. Both of these masses can clearly be seen in fascist state data on industrial utilization and labor force participation. The crisis can, in this sense, be posed as a question of how to increase production by bringing these underutilized “assets” into play.
Ending the crisis seems a simple matter of putting people to work with already existing means of production to produce commodities. However, when addressed this way a critical piece of the mode of production is missed: Both the employment of capital and of workers is determined by profit that can be realized through their employment. The unmentioned premise of any simpleton discussion on exiting the crisis is how these two masses can be employed profitably.
The discussion is further complicated by the fact that it is a fall in profit that leads to the formation of under-utilized capital in the first place — the mass of underutilized capital and the mass of underemployed workers does not form up by themselves but are produced by a fall in profits. Capital will only expand employment of constant and variable capital so long as a profit can be realized through this increase. But if the two could be employed profitably, there would be no question of fascist state intervention in the operation of the mode of production.
This would suggest the sole aim of fascist state intervention in the economy is to increase profits. However, there is a problem with this statement that has to be addressed. The way I formulated the problem might lead to the impression that the fascist state can increase profits through its intervention. The statement, “the sole aim of fascist state intervention in the economy is to increase profits”, is theoretically incoherent in labor theory, because the single source of profit is labor — but the statement makes it appear as if state policy action can be a source of profit as well. To understand the role of the state in the crisis, it is necessary to understand that the state cannot in any way increase profits. Since it cannot increase profits, the state could not, on any account, increase the employment of the excess capital and labor. If the state does not increase profits, how does fascist state economic policy actually work?
Remember the crisis presents as a mass of under-utilized capital and a mass of under-employed workers. This double mass is entirely excess, superfluous and, therefore, incapable of being employed as constant and variable capital, i.e., to produce surplus value. However, it still can be employed unproductively, as fascist state spending, as was the case in World War II. This surplus value cannot be realized as profit and must end up as the expenditures of the fascist state. The portion of the mass of surplus value that can be realized as profits and can be reinvested productively (defined as investment that results in the production of surplus value) declines over time. On the other hand, the portion of surplus value that must become fascist state expenditures increases over time.
What the simpletons call “a tendency toward secular stagnation” is nothing more than an ever increasing mass of surplus value that cannot become capital. The result is that an ever increasing share of this surplus takes the form of fascist state expenditures, as the chart below demonstrates:
However, this argument is also problematic on its own: If we assume the mass of profits cannot increase beyond some definite limit, what purpose does unproductive state spending serve? Logically, the mode of production should come to a halt at the point where the mass of surplus value realized is maximized. Unproductive, entirely wasteful, state spending seem to make no sense at all. Indeed, John Cochrane makes just this case for (really against) the New Keynesians:
“If you want to use new-Keynesian models to defend stimulus, do it forthrightly: ‘The government should spend money, even if on totally wasted projects, because that will cause inflation, inflation will lower real interest rates, lower real interest rates will induce people to consume today rather than tomorrow, we believe tomorrow’s consumption will revert to trend anyway, so this step will increase demand.'”
Imagine the president getting on television and making an argument like that:
“My fellow Americans. We know all this fascist state spending is completely wasteful. But we really need the jobs.”
However, this was essentially the statement made by Washington in the winter of 2009 when it looked like the end was much nearer than previously imagined. A general call went out from Washington for “shovel ready projects” from the states, and very little attention was paid to the usefulness of the projects. The idea was to get as many people working as quickly as possible to stem the collapse of capitalism.
The theoretical problem is not answered by actual events in 2009, however. Yes, it can be shown that Washington literally shoved money at the states to get them to spend, and shoved tax cuts at everyone to boot. What remains to be explained is how this wasteful spending addressed the problem of the falling rate of profit that caused the crisis in the first place.
Part of the problem explaining how wasteful fascist state spending raises the rate of profit is that it doesn’t really raise the rate of profit. In labor theory, profit is defined as the total surplus value divided by the total constant and variable capital set in motion, usually presented in the form of the equation
profit = s/(v+c).
However, in labor theory, fascist state spending has no impact whatsoever on this real rate of profit and cannot have an impact on it. The production of surplus value takes place on the factory floor of the capitalist firm, not in the halls of Congress. One obvious exception to this case is war: the fascist state can bomb the constant and variable capital out of existence. By destroying some portion of the total mass of industrial capacity and killing off a portion of the population, the remaining portion gets employed to pick through the rubble and rebuild. This has a pronounced impact on raising the rate of profit for the surviving capitalists, but at the cost of wholesale destruction of society. Krugman has made several arguments along this line before:
“World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy … It’s especially relevant because in the 1930s, as today, many wise heads insisted that unemployment was structural, that many of the unemployed could not be gainfully employed no matter how much demand increased. Then demand actually did increase…”
To be clear: Krugman does not suggest war is a good way to end depressions. What he does argue that World War II showed that even waste in the form of war can do the job. It does not matter what form this waste takes so long as there is waste. And this is critical because, apart from the war itself, the waste in the form of the Obama stimulus bill in 2009 did not differ in character from Roosevelt’s “stimulus”. Both involved the wholesale destruction of the productive forces on scale unimaginable in any previous epoch. What was to some extent an extraordinary event in World War II has become routinized in the annual federal budget. In fascist state management an ever increasing share of the s produce by employment of c+v is destroyed via unproductive expenditures.
This destruction of means of production is inflationary, because, no matter that the expenditures are entirely wasteful, society, i.e., the working class, still pays for them with its labor time. Inflation is nothing more than the waste of labor time on a grand scale making itself felt through a general increase in prices. Contrary to the simpleton definition of inflation — a general increase in the price level — in labor theory the only way to produce inflation is through a general increase in the quantity of unproductive labor time expended on production of commodities. This increase in labor time results in an increase in prices for the reason that the increase in labor results in no additional commodities. The bourgeois simpletons hope to create inflation in order to increase labor time, perhaps never realizing inflation results from unproductive labor.
According to Keynesian assumptions, to get inflation, you have to increase the unproductive labor time of the working class. However, the dominant monetarist theory argues that inflation can be produced by increasing the supply of currency in circulation. Rather than inflation increasing the supply of currency in circulation, the simpletons argues the reverse. This is because they employ what they call the “quantity theory of money” (QTOM), which states prices are a function of the supply of currency in circulation.
To follow the thinking of the bourgeois simpletons on the problem of exiting the crisis from its point of origin then:
- An increase in the supply of currency will lead to an increase in inflation.
- The increase in inflation will increase nominal prices.
- The increase in nominal prices will increase nominal profits.
- The increase in nominal profits will spur increased employment of labor power and of capital.
The Keynesians differ with this chain of proposed exit linkages in one way: unproductive fascist state fiscal spending is necessary to kick it off. (And the state spending must be unproductive if it is not to add to the problem of excess capital and an excess population of workers.) The state plays a critical role by forcing the additional currency into circulation with its purchases. It appears the difference between two schools of bourgeois thinking begins with a simple question: Does exit from the crisis require fascist state spending?
To give one example of the dilemma in real time: the Eurozone has no EU-wide facility for fascist state spending. The EU was deliberately constructed without a “fiscal authority”, assuming only monetary policy was necessary. The EU is a textbook case for determining whether the quantity theory of money is theoretically valid. The ECB should be able to end the depression simply by taking steps that increase the quantity of fiat. The evidence for the QTOM is thus far lacking and the Eurozone countries continue to spiral down out of control. The key is that it calls into question the quantity theory of money, since the failure of ECB efforts to date suggest the exit begins with Keynesian spending not money. It is the demand created by the state for excess capital and labor, not an increase in currency in circulation, that allows capital to exit the crisis.
This, however, calls fascist state spending as a means to exit the crisis into question, since all sides agree this spending is simply the most perverse waste of productive forces. True, war is not itself necessary, but this is only because war is not the only way to waste social resources on a grand scale.
However, I don’t think the quantity theory of money is itself to blame in this case, however. To be honest, I can’t imagine anyone running a multi-trillion economy is stupid enough to think prices are determined by the quantity of fiat currency in circulation. The real explanation for the domination of monetarist theory can be attributed to the chart I showed earlier. That chart shows that the result of Keynesian policies is that an ever larger share of surplus value ends up not as profits but state spending.
This calls to mind the Austrian economist Hayek’s “Road to Serfdom”. A straight line projection of the tendency would suggest eventually all surplus value is consumed by the state with zero profits for “private capitals”. It may be that the quantity theory of money gets revived by Friedman as a response to the logical implication of Keynesian policies.
One thing to note about the state’s share of GDP since 1900 is that the fall of the growth of the state’s share of GDP below trend eventually leads to depression. You can that clearly between 1900-1929 and again between 1990-2012 in a slightly modified version of the above chart :
In both cases, the state’s share of GDP fell below trend followed by a reversion to the trend. But, and this is important, the reversion to trend was itself the crisis — a forcible reestablishment of the state’s share of GDP. If my reading of labor theory is correct, Hayek’s “road to serfdom” is paved with a mass of excess capital. So long as the production of surplus value continues, the unproductive consumption of labor time will continue. So long as the unproductive consumption of labor time continues, the fascist state’s share of GDP must rise.
The search for an exit from the crisis would seem to hang on the simpletons finding a means of disposing of the mass of superfluous labor and capital that does not result in a growing share of surplus value being consumed by the state.