The hidden conflict within the fascist state for control of economic policy (2)
Part Two: The collapse of the Keynesian policy consensus
As I stated in my previous post, the conflict over control of state economic policy can be traced to the Great Depression. Keynes set the state economic policy framework for this conflict by tracing the cause of the Great Depression to the improvement in labor productivity. According to Keynes in 1930, the depression was caused by capital reducing the need for labor faster than it could find new uses for labor. Of course, capital only has one use for labor: the production of surplus value, production of profit. Keynes was essentially confirming Marx’s prediction that the diminishing need for labor would lead to the collapse of commodity production.
According to Marx’s labor theory the price of a commodity is only the expression of the “socially necessary labor time” required for production of commodities. This implied that as the labor required for production of commodities fell, so would their prices. When the Great Depression hit, the problem pointed out by Keynes, that the reduction of labor was outrunning the pace at which capital could find new uses for labor, was expressed in deflation, i.e., generally falling prices.
Marx’s argument that the prices of commodities were tied to their labor value carried deadly implications for capitalism. Since prices paid for commodities was the only way the capitalists could recover their investment. Falling prices implies growing pressure on profit. If the capitalists could not sell their commodities at prices to cover their investment plus profit, capitalist production for profit would come to a standstill.
The inherent limits of Keynesian policies
Thus, in 1933 Keynes turned his attention to how prices could be raised. Keynes argued state deficit spending was necessary for this, because only the state could borrow capital on the scale required during a depression. By the 1970s depression, however, following the so-called “golden age”, when Keynes’ policy recommendation was tried a problem soon became apparent: prices very quickly got out of control. During the 1970s depression prices did not fall; instead we got “stagflation” — a condition where real economic growth slows, while prices skyrocket.
Keynes was aware of this potential problem and wrote about it in his 1933 essay. He argued that once the resources that could be productively put to work were fully employed, state deficit spending would not add to growth:
“If the resources of the country were already fully employed, these additional purchases would be mainly reflected in higher prices and increased imports.”
Now, what does this have to do with the conflict over state economic policy? Borderline hyperinflation generated a huge political backlash among the capitalists against Keynesian policies for reasons many on the Left still fail to recognize today. There is an inherent material limit to effective Keynesian economic management policy and Washington likely hit that limit in the 1970s.
Keynes argument suggests the cause of the Great Stagflation during the depression of the 1970s resulted from applying his solution under conditions where it could not work. As Keynes wrote, if all the resources that could be productively employed were already employed, a country would not get more so-called economic growth, but would suffer the twin maladies of hyperinflation and a deepening trade deficit. Thus, when Keynesian policy failed in the 1970s, it was supposed to fail. Keynes himself predicted it would fail!
According to Keynes, then, there was a limit on the efficacy of his policy recommendation: if the resources of a country that could be productively employed were already fully employed, state deficit spending would only lead to inflation and trade deficits. And almost on cue, starting with the 1970s US began experiencing borderline hyperinflation while its trade deficits exploded. It would appear the stagflation of the 1970s implied that, by definition, resources that could be productively employed were already fully employed.
It is important to point out that Keynes never said that when his policy ran into its limits everyone would have a job; and he never stated or implied poverty would be wiped out. He simply said if productive resources were fully employed deficit spending would only produce inflation and trade deficits. Marx explained why this was so fifty years earlier. In the capitalist mode of production, said Marx, all production is carried on for the purpose of producing profit. This meant there was an inherent tendency for capitalist production to halt well before unemployment and poverty were eradicated:
“There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.
There are not too many means of production produced to employ the able-bodied portion of the population. Quite the reverse. In the first place, too large a portion of the produced population is not really capable of working, and is through force of circumstances made dependent on exploiting the labour of others, or on labour which can pass under this name only under a miserable mode of production. In the second place, not enough means of production are produced to permit the employment of the entire able-bodied population under the most productive conditions, so that their absolute working period could be shortened by the mass and effectiveness of the constant capital employed during working-hours.
On the other hand, too many means of labour and necessities of life are produced at times to permit of their serving as means for the exploitation of labourers at a certain rate of profit. Too many commodities are produced to permit of a realisation and conversion into new capital of the value and surplus-value contained in them under the conditions of distribution and consumption peculiar to capitalist production, i.e., too many to permit of the consummation of this process without constantly recurring explosions.”
According to Marx, under capitalism the production of commodities is carried on for the purpose of employing these commodities as further means for self-expansion of capital. Thus, the problem is not that too much material wealth is produced by capital, but too much wealth intended solely to be put to use as capital is produced to be employed as capital. Thus, ultimately, the rational solution to the problem Keynes originally identified, (capital was eliminating the need for labor faster than it could find new uses for labor) wasn’t deficit spending. It was reduction of hours of labor — just as Keynes argued in 1930.
Why the capitalist resist labor hours reduction
From the capitalist point of view, reduction of hours of labor has two important defects: first, the profit produced by a capitalist firm is a function of the duration of the labor day. Putting aside the costs of materials and machines, the worker must labor some definite duration of time to reproduce the wages paid to her by the capitalist in return for her labor power. The capitalist has already advanced this cost and must recover it by putting the worker to work producing commodities he can later sell. Beyond this duration (however long it might be), capitalist production is carried on for profit. This means the labor day of the worker is not ended once she has reproduced the value of her wages, but must work some definite additional time to produce the firm’s profit.
Thus, a general reduction of hours of social labor does not solve the problem of capitalist overproduction for the capitalist; in fact, it only intensifies the problem. Now, in addition to falling prices putting pressure on profits, a legally mandated limit on the labor day further cuts into the duration of labor the capitalist can impose on the worker in return for her wages. This necessarily increases pressure on capitalist profits. For the worker it is otherwise: a general reduction of hours of labor progressively frees her from labor without the constant fear of unemployment, while competition within the working class over sale of labor power diminishes — leading, at least in theory, to improved conditions for combination by the workers against the capitalists.
The second defect of a general reduction of hours of labor from the point of view of the capitalist is that this reduction has the effect of accelerating the introduction of improved organization, machinery, science and technology to replace the employment of labor in production, as well as by increasing the scale of capitalist operation through bankruptcies and mergers. Since reducing hours of labor adds pressure on profits, the capitalist’s attempt to compensate for this by the above methods to raise the rate of profit. However, since efforts along these lines only reinforces what Keynes originally identified as the problem of the Great Depression — that capital reduces the need for labor faster than it can find new uses for labor — obviously reducing hours of labor again only exacerbates this tendency.
Bankers in Control: Keynes is overthrown
With Keynesian economic policy having run into its inherent limit and no prospects for an effective alternative to reducing hours of labor on the horizon, the fascist opted for the next best thing: overthrowing state economic management entirely. Beginning in 1979, Washington plunged its own economy into a deep and prolonged recession by pushing its policy rate to an unprecedented and unimaginable level. This event has been called the “Volcker shock” and it was the final blow to Keynesian economic policy.
According to Wikipedia,
“The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well. Thus, the unemployment rate rose to over 10%”
If Keynes argued credit should be plentiful and cheap, Volcker made sure it was expensive and scarce in order to wring the inflation produced by Keynesian policies out of the economy. At the same time, Washington revised its fundamental economic policy in the form of the Full Employment and Balanced Growth Act, which explicitly made full employment dependent on the Federal Reserve’s capacity to maintain low inflation. According to Wikipedia,
“Consistent with Keynesian theory, the Act provides for measures to create temporary government jobs to reduce unemployment, as was attempted during the Great Depression.
Somewhat contradictorily, the Act also encouraged the government to develop a sound monetary policy, to minimize inflation, and to push toward full employment by managing the amount and liquidity of currency in circulation.”
In other words, although claiming to continue failed Keynesian economic management, Washington in fact disposed of these policies entirely. Under the guise of championing central bank independence and bringing a halt to fiscal dominance, Washington turned management of the economy over to the Federal Reserve finance cartel. Friedman and the monetarists had won the debate on the basis of the silly promise that growth could be managed simply by properly managing the supply of money.
The banksters were now in control of the economy, but the Great Financial Crisis of 2008 and the failure of central bank control still lay in the future.
I will turn to this next.