marxism 2011 program notes: keynes vs. marx: can capitalism be reformed?

These are my notes from the 2011 Marxism conference in Toronto. The series starts here.

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I was especially interested in this talk, as for much of my life I would have considered myself a reformist in the Keynes mode. I slowly learned that reform can never work, and now seek to know more about alternatives. Hence my exploration of socialism.

The following are the notes given to me by the comrade who gave the talk, plus my own editing.

Keynes vs. Marx: Can capitalism be reformed?
May 28, 2011

John Maynard Keynes [pronounced "Canes"] was a British economist who was most influential in the period immediately before and after WWII.

For reasons that I am going to discuss, he influenced a period of economic regulation (often referred to as Keynesianism) that many people look to as a golden age of capitalism - one in which workers were reasonably well-paid, enjoyed reasonable job security, and a degree of comfort and luxury that had not been seen before and has not been seen since that period ended.

The Keynsian system was developed out of an analysis of the great depression, and his system was a proposed solution to the boom and bust cycle of capitalism. Therefore, Keynes has been getting a great deal of attention from contemporary economists, who had hoped to find a solution to the current economic crisis in his theory.

Before Keynes: a crash course in classical economic theory

Before Keynes' economic theory came to the fore, the dominant economic theory was neoclassical economics. This is essentially laissez-faire economics that relied on the market to regulate itself and called for as little state interference as possible.

Without getting into economic jargon, one can say that this system was capitalism at its simplest. Goods were produced and sold by capitalists on the open market, with more and more capitalists producing greater and greater numbers of goods.

Eventually, markets became saturated, meaning that there just weren't enough people interested in buying all of the goods produced at the price they were being sold. Capitalists' solution to this problem was to sell their products for less.

This had the double advantage of both undercutting their competition, and also encouraging greater consumption, by making their goods available to people who may would not have been able to afford them at the higher prices, thus turning what was once considered luxury goods into household staples, such as cars and computers.

Thus, as capitalists sold goods for lower prices, other capitalists were forced to lower their prices in order to keep up or be run out of business. And as prices fell, capitalists discovered greater and greater demand for their products as more people could afford to buy them.

But lowering prices for goods can only go so far. There is, of course, a certain cost of production for the goods that capitalist produce - the cost of labour, of machinery, rent, raw materials, and so forth required to actually make the goods. And if the race to lower prices results in prices dropping below what it actually costs the capitalist to produce the goods, then the capitalist cannot sell the goods, or he would operate at a loss (i.e., production would cost him money rather than make him a profit).

This leaves the capitalist with a dilemma. With the market eventually becoming saturated with goods at the same price, with competition taking away his share of the market, the capitalist is driven to somehow lower the cost of production.

The first way that the capitalist does this is through the basic mechanism of capitalism, how he gets his name. He takes his profit and reinvests it in more advanced means of production, more efficient machinery, mechanization and robotics, bigger factories that save him money because of economies of scale.

In this way, the capitalist increases the productivity of his workers, allowing him to produce more goods for the same production costs, and thus letting him sell those goods for less without losing money. Unfortunately, this only serves to further saturate the market by flooding it with more cheap goods.

At the same time, the cost of investment, of making the means of production continues to rise, since researching and equipping workers with robotic mechanization is exponentially more expensive then equipping them with bigger hammers.

The crisis never ends

Thus - eventually but inevitably - the crisis returns.

A crisis of overproduction. Unable to lower prices any further without selling for less than it costs to produce the goods, with a saturated market, the capitalist is forced to sell fewer goods, to let some goods just sit on the shelves or in warehouses to rot.

Fewer goods means less profits, less investment, and an inability to cover overhead costs. Thus the capitalist is forced to do one of two things: cut production and fire workers, or attempt to lower the cost of production further by cutting wages and squeezing workers through oppressive management techniques - increasing workers' productivity not by aiding their work through efficiency and automation, but through outright oppression, forcing them to work harder for less pay.

The sum total of classical economic wisdom on this subject was that in these crises, if workers behave "rationally" and allow their wages to be cut, they remain employed, full production is maintained and the price of goods continues to lower. Thus according to classical economists, in a sense, even with lower wages, the invisible hand of the market ensures that more people were to have greater access to more goods.

Unfortunately, reality does not match theory. After a series of minor but increasingly worrying economic crises over the 19th century, the Great Depression of the early 20th century put an end to classical economic theory, at least for a time.

The Great Depression was a massive, cascading crisis of overproduction that caused an almost total financial meltdown. Keynes' analysis of the depression showed an awareness, at least to some degree, of a principle that Marx had understood decades earlier.

The basic principle of Keynes' work is that the buying power of the market determines its ability to absorb production. Thus, cutting the wages of workers in a crisis, rather than lowering production costs and allowing more goods to be sold for less, has the opposite effect. As workers' wages were cut, their ability to buy goods suffers, and the crisis only deepens.

And that is exactly what happened during the Great Depression. The first few years of the crisis were only the first steps, and as workers lost their jobs or were forced to accept lower wages in order to keep their jobs, their buying power dwindled and they consumed even less. This caused a growing cascade in which market sectors that were initially unaffected started to suffer, as people's buying power had sunk so low, that they were now unable to afford goods they had previously purchased.

The Keynes reforms

Having correctly identified the root of the problem, Keynes' solution was the opposite of that proposed by classical economists. Keynes proposed that, rather then lowering wages, every effort possible be made to raise people's spending potential. If increased wages were not possible, then what was needed was government subsidies to workers through social services, as well as monetary distribution through social assistance and unemployment assistance.

To Keynes, it was more important that the government provide wage subsidies to stimulate the economy than that the government avoid debt or high taxes.

Shifts towards a Keynsian system of economics were made during the Great Depression, with the most notable example being Franklin Delano Roosevelt's New Deal, which focused on increased government spending and support for the poor and unemployed.

Still, the Great Depression was so severe, and so widespread - had cascaded to so many industries - and left so many unemployed and underemployed, that a recovery along Keynsian lines alone would have been very slow, if at all possible.

What actually ended the Great Depression, as we know, was the second World War, in which enough of the world's industrial capacity was destroyed, and enough of the remaining industrial capacity diverted to non-productive wartime functions (i.e. producing goods that didn't have to be purchased by consumers), that, by the war's end, the crisis of overproduction at the root of the system had been eliminated.

During the Post-War period, almost every capitalist state in the world rejected neoclassical economics and embraced Keynsian economics, and a new phase of capitalism began. The new system is often referred to as the Fordist system, and it consisted of three parts: a Taylorist production model, a compromise with certain large key labour institutions, and a Keynsian so-called "welfare state."

The three pillars of the golden age of capitalism

The Taylorist production model is named after Fredrick Winslow Taylor, who founded the concept of Scientific Management. It essentially refers to the mass-production-line system of manufacturing, where production takes place in large centralized factories that are highly automated and efficient, and take advantage of economy of scale. Work is broken down into its most basic components (often referred to as "rationalized"), so that workers need very little training or education. Management focuses on labour discipline and automation. Work shifts start and ending at specific times, production rates are stable, and production cycles are long.

One of the most iconic examples of a successful Taylorist production model is the Ford Model T. (As Ford was famous for saying, you could have any colour you want, so long as it's black.) Through centralization, standardization, and mechanization, Ford was able to produce a product for mass consumption - the car - that had previously been a luxury only the rich could afford. He did it by ensuring that his factories were producing black Model Ts day in and day out, year in and year out, without retooling for different colours, with new shifts starting as soon as the previous shift was ending, so the machinery was never idle.

The Taylorist method of production was one of the pillars of the Fordist system. It allowed workers a certain degree of job security, and it freed them from the risk the capitalists faced. If a business went bankrupt, workers could easily transfer their production-line skills to another plant without much need for retraining.

The second pillar of the Fordist system was a labour compromise, in which large factories agreed to allow - and sometimes even encouraged - large unions to form in their plants, and working with state-mediated collective bargaining, agreed to pay their union workers quite well. Unions, for their share of the compromise, agreed to focus on wage-oriented demands (rather than revolutionary ones), and agreed to focus their efforts on the collective bargaining process, rather than costly labour disruptions like strikes or takeovers.

Not only did this ensure the labour stability necessary for the Taylorist production system, but it was directly informed by Keynsian economic theory. So long as workers were paid well, and so long as all the big capitalists, all across the market, adhered to this compromise and paid their workers well, workers would have a much higher spending power - which in turn would ensure a market for the massive quantities of goods coming out of the highly efficient Taylorist production lines.

Finally, the third pillar of the Fordist system was the Keynsian so-called "welfare state". Under this system, businesses would be highly taxed, governments would operate in a deficit, and a very high standard of social services and support mechanisms would exist, maintained by a well-paid government work force, to protect workers and stimulate the economy. The welfare state was, in part, an attempt to lower worker radicalism and militancy, and support labour peace, by encouraging workers to turn to official channels to solve their work-related problems. So even when collective bargaining failed, some government support would exist to help workers until they found new or better paying jobs.

At the same time, the influx of government money was meant to stimulate the economy during periods of economic slump, provide economic support for families during layoffs, and ensure that high spending could continue.

This Keynsian-inspired economic system that was put in place in the Post-War period is considered by many to be a golden age of capitalism, a period of uninterrupted economic growth during which a vast segment of ordinary workers began to enjoy a standard of living once previously unknown to working people. The family home, two cars, household appliances, family vacations - and the wages to afford them all and more - suddenly became available to many workers.

But, eventually, around the end of the 1970s, and throughout the 1980s, the Fordist system was systematically dismantled. Economists and governments turned back to a system more closely resembling the classical economics that Keynes had fought against. This is what is now known as neoliberalism.

The rise of neoliberalism

With the shift towards neoliberalism, and the expansion of a much more unregulated system of free trade, the compromise that had been achieved with workers and unions was abandoned. Citing the need to compete with foreign production, workers were threatened with layoffs if they did not accept concessions and wage cuts, while government taxes on businesses were dropped (and often eliminated), supposedly as "incentives" to keep businesses from moving away to less regulated markets - which they did anyway, while keeping their tax breaks.

The loss of corporate tax revenue meant that social services and social assistance were slashed, as governments argued that they could no longer afford those services.

This was, of course, more than anything else, a money grab on the part of capitalists across the world. As dire threats of layoffs and foreign competition were paraded in front of workers in order to force them into concessions, and as incentives were demanded (and received) from governments of all political stripes, the capitalists reaped a fortune in lowered production costs.

But there was more going on than simple capitalist greed. Capitalists had not suddenly become more greedy then they had been in the 30 years of the preceding Post-War period. The problem was that - despite Keynesian attempts to save capitalism and ensure perpetual growth - by the 1970s, the Fordist system was failing.

Keynes may have understood the system well enough to successfully challenge the proponents of laissez-faire free market economics. However, his refusal to question the logic of capitalism itself meant that he did not recognize something that Marx had discovered decades before him,: the tendency of the rate of profit to fall.

Overproduction again

At its core, the problem was again a problem of overproduction. Despite the well-paid workers and social subsidies, local markets in the US and Europe were becoming saturated. In addition, policies in developing countries meant that foreign markets were becoming quickly saturated as well.

Too many goods were being produced at a cost that the market could not absorb. But it was becoming more and more difficult for capitalists to produce more efficiently and lower the prices of goods because, as previously noted, capital investment becomes progressively more expensive as it becomes more advanced.

The capitalists certainly were investing massive amounts of money into research and development, and into increasing the efficiency of highly-developed robotic production lines. But efficiency and the lowering of production costs simply could not keep up with an increasingly saturate market.

In the US and Europe, attempts were made to lower production costs the only other available way: to lower wages. In the 1970s, however, a highly unionized workforce resisted, and wages did not drop.

This meant that by the 1970s, the problem had become quite severe. The economy was teetering on the brink of collapse. Capitalists found themselves in a situation where plants and equipment was sitting unused (and costing money), while they faced intense competition.

Enter geographic dispersal of labour control

According to Marxist geographer David Harvey, it was through "geographic dispersal to zones of easier labour control, mergers, and steps to accelerate the turnover time of their capital" that corporations managed to survive this period.

Since corporations could not push unionized workers to accept drastic wage cuts, they relocated to parts of the world which didn't yet have a tradition of organized labour, and where living standards were considerably lower. Workers in the old centres of production were forced to accept the labour standards of the new centres in order to compete. States were forced (some willingly, and others less willingly) to lower corporate taxes for much the same reason, resulting in the erosion of the social services Keynes insisted were necessary to regulate the economy.

The Taylorist system of production - with huge production lines, producing a single product for a long time - was changed to a new, flexible system of production, where highly novel products were produced for short periods of time, then dropped when they were no longer profitable. Labour conditions became much less stable, with temporary workers hired during production spikes, then laid off during downtimes. (This was also aided by changes in communications and transportation technology, which made it easier for companies to constantly move their production in search of ever-cheaper labour.) (This is also directly tied to the destruction of the planet, as separating production from consumption by thousands of miles is heavily dependent on fossil fuels.)

From the 1980s and onwards, the western world entered a nightmare of capitalism at its rawest, with high rates of unemployment of labour, high risk for capital, constant cutthroat competition, both among workers and capitalists, plummeting wages, and a transition to a constant state of unstable temporary employment.

This happened because Keynsianism failed. It happened because, as Marx explained, capitalism is inherently unstable. It suffers from a tendency of the rate of profit to fall.

Eventually, increased competition, overproduction, and the rising cost of re-investment, combine to makes it impossible for capitalists to turn a profit indefinitely.

Eventually, we enter into a period where capitalism is forced to start eating away at its own base in order to survive. Keynes was correct about that much. As wages are lowered, workers' spending power decreases, and gradually, this undermines the system, causing markets to saturate even further, causing an even greater crisis.

Where we stand today

Today, the only reason the economy still functions, the only reason people in the West still buy goods at all, is because they have augmented their dwindling spending power by going further and further into debt.

But of course, one cannot live on credit forever. Eventually, the bubble will burst. And when that happens, the system will suffer from greater and greater crisis - just as when the mortgage bubble burst and caused the current global financial crisis.

Whenever credit fails (like the housing bubble), the crisis returns. And the previous dismantling of the Keynsian welfare state makes us completely unable to deal with the problem.

Interestingly enough, the recent global crisis led to both a resurgence in interest in Keynes economic theories, and a supposed "solution" that was Keynsian in a sense - but in reverse. Rather than increasing social spending, and giving money to consumers into order to boost the economy, money was given directly to the capitalists themselves.

Keynes talked about this as well. He argued that it was more effective to give money to consumers through the use of social services because money would then be exchanged through more hands, ultimately stimulating the economy. Stimulus money would pay the salaries of government workers, who would then be able to buy more goods, and help cover the costs of workers, who would also then buy more, and only then would the money fall into the hands of capitalists, who would (theoretically) reinvest it.

Keynes probably would have proposed a similar solution to the financial crisis, but he probably would have wanted the bailouts to go to consumer subsidies and public works, essentially a new New Deal, rather than just handing money over to bankrupt banks.

Keynes wanted only to keep capitalism working. And even then, his theories prove ineffective. The Fordist system ultimately collapsed. It was torn down by radical conservatives, but it was already failing.

This leaves us trapped between the proverbial rock and a hard place. On one hand, laissez-faire capitalism fails because it overproduces and at the same time tears spending power away from markets through attacks on workers. On the other hand, regulated, Keynesian capitalism fails because it isn't flexible enough to deal with the tendency of the rate of profit to fall.

It can't be regulated

As Marx recognized in the heyday of capitalism, the system is inherently unstable. There is no way to stabilize it, to regulate it, and to eliminate its inherent contradictions.

This is not to say that capitalism is now or ever will be on the verge of collapse. It has enough countervailing tendencies to keep it functioning in perpetuity, even as it lurches from one near catastrophic financial crisis to the next even greater one. But the process is not pleasant.

As the rich get richer, and competition forces them to squeeze workers ever tighter - as mega-corporations teetering on the edge of collapse go bankrupt, resulting in massive unemployment and destitution - as war becomes ever more common because of competition for markets and resources, and, more importantly, because war is a way to siphon away overproduction - and as life for the working class becomes an increasingly desperate, increasingly cutthroat struggle to survive - capitalism will go on.

Capitalism will go on, reformed or unreformed, and the majority of people on earth will suffer from it. Unless the working class, through self-conscious organization and mobilization, succeeds in carrying out a revolution, seizes control of the means of production, eliminates private ownership of companies, and creates a system that produces goods for human need, not driven by the insatiable need for profit.

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