Why Keynesian policies cannot permanently forestall the collapse of capitalism

by Jehu

Interesting question on my ASKfm:

“Can you explain why fiat currency is not a permanent solution to the overaccumulation of capital/falling rate of profit?”

The answer will require some explaining. I hope I do not get too deep in the weeds of labor theory with this answer. Briefly stated issuing fiat currency to avoid the final collapse of capitalism runs up against problems that are not immediately obvious.

Overaccumulation of capital and the collapse of the profit rate to zero cannot be permanently solved by the state counterfeiting of its currency. This much will be obvious if we can agree on what the phrase, “overaccumulation of capital” means in the first place.

Even determined opponents of Marx’s labor theory of value will concede that capitalism occasionally produces more of one commodity or another than can be absorbed by the market. This occurs when the product of labor in one branch of industry or another exceeds the demand for that commodity owing to the improved productiveness of the labor employed in the production of commodities.

This might be expressed, for instance, in the production of too many houses, such that the quantity of houses available for sale exceeds the demand for houses in a country. A crisis in the house industry thus takes the form of “too many houses, too little demand.”

However, expressed in the form of “too many houses, too little demand”, the crisis presents itself in an ambiguous way. For instance, does “too many houses, too little demand” imply overproduction of houses or too little demand for those houses.

This ambiguity is further exacerbated once we consider that the houses in question are not simply produced, but also must be sold. To be sold at an average profit, individuals must purchase the houses at a certain price with money — “demand” always means “money demand”, that holders of money are willing to part with it for your commodity.

A further ambiguity is presented by the fact that, in the capitalist mode of production, the consumption power of the greater part of society is predicated on the sale of their labor power for wages.

Thus, although a crisis in housing begins with a definite improvement in the productiveness of labor and a consequent reduction of the labor time required to produce a house, it first makes itself felt as a lack of demand for houses owing to the relatively low wages of the workers.


This is the case cited by Keynes in his 1933 essay, The means to Prosperity, when he pointed to the lack of housing industry activity in the UK even in face of the strong need for employment and  housing by the population:

“The paradox is to be found in 250,000 building operatives out of work, when more houses are our greatest material need. It is the man who tells us that there is no means, consistent with sound finance and political wisdom, of getting the one to work at the other, whose judgment we should instinctively doubt.”

As Keynes suggested, in a country where there is, on one hand, a mass of unemployed capital and, on the other hand, a mass of unemployed workers, it is a no-brainer to set one at work with the other producing housing that everyone knows is needed.

The problem with Keynes approach here is that he takes the effect of the crisis for the cause. Which is to say, in 1933, Keynes treats the problem as one of a lack of demand which can be fixed by an expansion of state borrowing of the excess capital in order to employ the unemployed population of workers, who then can be set to work building the houses everyone needed.

However, earlier, in 1930, in another essay, Economic Possibilities for our Grandchildren, Keynes is not so sanguine. At that time, Keynes diagnosed the problem correctly as an excess of supply of labor power for which there was no productive need, leading to what he called “technological unemployment”, i.e., the displacement of human labor by automation:

“We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come—namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.”

Unlike in 1933, when Keynes thought the solution lay in increased borrowing by the state; in 1930, Keynes expressed the opinion that hours of labor eventually would have to be reduced to 3 hours a day by 2030. As the productiveness of labor increased, hours of labor would have to decline:

“But beyond this, we shall endeavour to spread the bread thin on the butter-to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!”

As earlier, you can see that if the problem of overaccumulation of capital presents itself ambiguously, the solution to overaccumulation is equally ambiguous. Should we address the obvious lack of demand for commodities by means of counterfeiting the currency or the equally obvious excess supply of labor power by means of reducing hours of labor?


What accounts for this rather significant shift in Keynes’s thinking from the need to reduce hours of labor to the need to expand state debt driven demand between 1930 and 1933?

While I have no actual evidence, I want to suggest that Keynes’s thinking was influenced by two important developments in the world market. In 1933, Keynes had the experience of two countries to draw on that he did not have in 1930.

The first was that of the Soviet Union, which, since 1930, was engaged in a rather stunning industrial expansion while the rest of Europe languished in the middle of the Great Depression. I would suggest that no one could have watched this effort without calling into question the prevailing wisdom on the relation between the state and the economy.

The second was the experience of Nazi Germany, which was just beginning to show that planning (at some level) could be applied even to advanced capitalist countries and was not merely a Bolshevik innovation. There is no question that Nazi Germany was proving the depression could be tamed by aggressive state action. By 1936, Nazi Germany would be the first industrial capitalist economy to claim to have achieved so-called”full employment”.

Both the Soviet Union and Nazi Germany showed, each in their own way, that economic crises were not natural events, like earthquakes or thunderstorms, and could be at least ameliorated by aggressive state intervention in the economy. The state did not have to wait passively as the normal conditions for capitalist production were restored. Acting aggressively, the state could (within certain limits) impose those conditions on the national capital by means of its economic policies.


If the Great Depression was simply the sudden appearance of a mass of unemployed capital and a surplus population of workers, Keynes argued in 1933 that the state could simply borrow the excess capital, buy the labor power of the unemployed workers and put both to work on projects of its choosing. This is essentially the argument Keynes made in a brilliant passage from the first essay I quoted and which (forgive me) I will quote in full here:

“It is often said that it costs £500 capital expenditure on public works to give one man employment for a year. This is based on the amount of labour directly employed on the spot. But it is easy to see that the materials used and the transport required also give employment. If we allow for this, as we should, the capital expenditure per man-year of additional employment is usually estimated, in the case of building for example, at £200.

But if the new expenditure is additional and not merely in substitution for other expenditure, the increase of employment does not stop there. The additional wages and other incomes paid out are spent on additional purchases, which in turn lead to further employment. If the resources of the country were already fully employed, these additional purchases would be mainly reflected in higher prices and increased imports. But in present circumstances this would be true of only a small proportion of the additional consumption, since the greater part of it could be provided without much change of price by home resources which are at present unemployed. Moreover, in so far as the increased demand for food, resulting from the increased purchasing power of the working classes, served either to raise the prices or to increase the sales of the output of primary producers at home and abroad, we should to-day positively welcome it. It would be much better to raise the price of farm products by increasing the demand for them than by artificially restricting their supply.”

Basically, Keynes was arguing that the excess capital of the capitalists could be borrowed by the state and used to employ the working class to increase output despite overaccumulation of capital within the home market. The initial spending of this excess capital by the state for its own projects would have what is today called a “multiplier effect” in which the new expenditures would lead to further employment and production.

The advantage of this approach is that it allows the state to attack the problem of excess capital and unemployment by means at its disposal, i.e., through its monopoly control over issuance of the currency.


But this approach has disadvantages as well.

For one thing, the continuous overaccumulation of capital is not done away with; rather, the excess capital produced by this overaccumulation is converted by the state into public debt. All that has been done is to change the form taken by the excess capital. If the state employs this excess capital productively, it will only adds to the problem of overaccumulation of capital and thus requires a still greater volume of debt to absorb.

The productive employment of capital means that the capital is employed to produce even more capital, for the self-expansion of the existing capital, and, thus, for further accumulation of capital on top of the already excess capital. If there are already too many houses to support demand, the productive employment of capital implies that so many additional houses will be tossed on the market to be sold at a profit.

On the other hand, if the state employs the excess capital unproductively, more labor power and capital is being employed with no increase in real output. The unproductive employment of capital means that the capital is not being employed to produce more capital, both are simply wasted.

If there are already too many houses to support demand, the unproductive employment of capital implies that no additional houses will be on the market seeking to be sold at a profit. However, it also implies that the costs of production in terms of labor power and constant capital have been used up with no increase in the total mass of capital in circulation. Increased costs with no increased output leads to increased prices, i.e., inflation.

Such a condition might be the result, for example, of employing farm workers to burn the excess crop in the agricultural industry. In this case the excess capital in the form of excess corn or wheat is borrowed and the unemployed workers are put to work, but their labor is being used directly to destroy the excess capital. The costs of production in terms of both corn or wheat and the wages of employed workers is advanced, but the result of the combination is the destruction of an existing mass of capital.

Labor in this form results not in the production of new value but in the destruction of a portion of the already existing value.


It is obvious that, in almost all cases, the state does not employ the excess capital and surplus labor power for unproductive purposes. In intervening to reestablish the normal conditions for capitalist production, the state is acting as the national capitalist, which implies it is seeking to constantly increase the national capital despite overaccumulation of capital. This in turn implies that, in the long run, state intervention in this way only exacerbates overaccumulation of capital.

The result is that each intervention by the state to address absolute overaccumulation of capital leads to even greater overaccumulation; and this greater overaccumulation requires an ever greater increase in the levels of public debt to address a now still greater overaccumulation. The result is that if the accumulation of capital grows, the accumulation of the public sector and public debt grows still more rapidly, progressively absorbing an ever large share of GDP as seen in this chart from Forbes magazine below:

Total government spending (federal, state and local) as a share of GDP, 1929 to 2010 (Source: Bureau of Economic Analysis)

The chart shows that from a low of seven percent in 1929, the state sector in the United States has swollen to absorb almost 40% of GDP in 2010 — just 81 years. Despite efforts to contain the state sector, its growth has been relentless.


The question posed to me is whether this relentless expansion of the state sector can continue permanently into the future. I think it is safe to say that even if we consider the problem one of simple geometric progression it cannot. The point at which the relentless expansion of the state reaches one hundred percent of GDP, (all else held equal), can be approximated by a formula devised for such calculations as shown on this math website.

Math-wise, the collapse of capitalism cannot be permanently avoided by borrowing or otherwise laying hold to the ever increasing volume of excess capital being constantly created by capitalism. That said, only a bunch of idiots would acquiesce to simply letting the collapse of capitalism play out this way. If we know capitalism has a definite shelf-life that we can calculate precisely, we would be negligent to simply wait for judgment day.

Logic suggests we should try to shorten that period.

This was Marx thinking behind the strategy he described in the Communist Manifesto in 1848 and remains relevant for us today. We need a strategy that makes “further inroads upon the old social order … as a means of entirely revolutionising the mode of production.”