Applying Marx (1983)

From the March 1983 issue of the Socialist Standard

We are now in the heaviest trade depression since World War II, with little expectation that recovery will take place in the near future. This has caused dismay and confusion among the economists, dividing them into half a dozen groups each with its own remedy and denouncing their rivals. Not only did they not foresee the depression but nearly all of them denied that it could happen. They had accepted the belief that it is possible for a government to prevent unemployment if it wishes to do so.

First in the field was the Labour Party. In its Election Programme. 1918. Labour and the New Social Order, it stated: "It is now known that the Government . . . can arrange the public works and the orders of National Departments and Local Authorities in such a way as to maintain the aggregate demand for labour in the whole kingdom”. (While they were the Government, 1929-1931, unemployment rose by 1½ million.)

By 1944. under the influence of J.M. Keynes, the three parties. Tory, Labour and Liberal (and the TUC), had all accepted the commitment to maintain "full employment”. It was set out in a document Employment Policy issued by the three parties represented in the war-time national government. Confidence in the policy was confirmed by the Committee on the Working of the Monetary System in a Report in 1958. In Paragraph 484 they said: "When discussing with witnesses the impact of restrictive monetary measures we have been constantly reminded that, as compared with earlier decades, restrictive developments have a much less frightening aspect now that Governments are always committed to full employment policies”.

Commenting on this. Professor F.W. Paish wrote: “This belief springs directly from the expectation that no government will in future allow any really substantial amount of unemployment to appear, even temporarily”. (The Banker, October 1959.) Actually, at the time the Committee published their report, unemployment was already on an upward trend after the very low levels of the ten years after the war. Unemployment rose again while the Labour Party was in office from 1964-1970, though they declared they would not let this happen, and it more than doubled under the Labour government of 1974-1979.

Towards the end of that government's office Prime Minister Callaghan and Chancellor of the Exchequer Denis Healey began to question the validity of the Keynesian “full employment” doctrine. Later, for the first time since the war. a government — under Thatcher — formally repudiated it. But they still claimed to be able to deal with unemployment, firstly by curbing inflation and secondly by reducing taxation: “The State takes too much of the nation's income; its share will be steadily reduced. When it spends and borrows too much, taxes, interest rates, prices and unemployment rise”. (The Conservative Manifesto — 1979.) After four years of office unemployment has risen from 1,300,000 to over 3 million.

The one economist who comes well out of this confusion is Marx. He showed that, in competition with each other to gain a larger market share, capitalists are always seeking to reduce prices by means of labour-displacing machinery and that inevitably depressions occur from time to time: "Capitalist production moves through certain periodical cycles. It moves through a state of quiescence, growing animation, prosperity, overtrade, crisis and stagnation". He never accepted that unemployment and depression could be avoided by some change of government monetary, taxation or investment policy. Nor did he accept the validity of the argument that unemployment would fall and depression be avoided by putting up wages. (The policy which the Independent Labour Party sought to popularise in the 1920s.) Marx showed that not only do wages rise in every boom, but at that time the working class “actually get a larger share of the annual product intended for consumption”. (Capital Vol. Ill. Kerr Edition, p. 474.) Far from remedying the situation this is, said Marx, "always . . . a harbinger of the social crisis".

Marx showed the limitations of the trade union struggle for higher wages. The aim of the capitalist in carrying on business is "the augmentation of his capital”. Wages can therefore go on rising only as long as the rise “does not interfere with the progress of accumulation". (Capital Vol. 1, p. 678 in the Kerr edition). Beyond this, accumulation slackens, "because the stimulus of gain is blunted", in other words, the employer does not for long employ workers out of whom he cannot make profit. Marx saw as inevitable a fall of the workers’ standard of living in depressions when, owing to heavy unemployment, the supply of workers overshoots the demand. Though he did suggest that “it might in such circumstances be necessary to test the real state of demand and supply by a strike, for example, or other method". (Value Price and Profit).

After Marx's death, Frederick Engels put forward the idea that Marx's cycle no longer applied, and had given way to "permanent and chronic depression”, but events soon showed that he was wrong and he returned to Marx's “cycle” theory. In the depressions of the 1880s and between the wars, a considerable number of workers and even some economists became convinced that Marx was right about unemployment and depressions. Then Marxist theory was pushed into the background by Keynes. John Strachey, who had claimed to be a Marxist, told how reading Keynes’ book General Theory of Employment, Interest and Money made him change his views. (He became a Minister in the Attlee Labour government). Richard Crossman. Minister of Housing in the 1964 Labour government, said that Keynes demonstrated that capitalism is not "an inherently unworkable system” and, by so doing, undermined “the old economic case for socialism". (The Times, 24 February 1956)

Even before Keynes dominated the scene most economists rejected Marx's labour theory of value, including the few who looked favourably on other parts of Marx's writings. It is interesting to notice the irrelevance of some of the more common objections to the labour theory, clearly the result of not troubling to understand it.

Marx explained carefully that he was dealing with commodities, articles regularly produced for sale and capable of reproduction. Because Marx showed that commodities have a value and a price the critics assumed, without any justification, that Marx must also be saying that everything which has a price had to be a commodity and have value. They have instanced the enormous prices paid for old master paintings, forgetting that these are incapable of reproduction and are therefore not commodities.

Marx answered the critics:

Objects that in themselves are not commodities. such as conscience, honour etc. are capable of being offered for sale by their holders and of thus acquiring, through their price, the form of commodities. Hence the object may have a price without having value. (Capital Vol. I p. 115. Kerr edition).

The late Harold Laski. who wrote quite sympathetically about Marx, gave an astonishing interpretation to the labour theory, in his book Communism (Home University Library 1927, p.95):

Thus we can measure the amount of labour-power in each man's effort, and so determine scientifically how he ought to be paid.

Laski borrowed this from A.D. Lindsay's book Karl Marx’s Capital (page 61). Lindsay wrote “The Labour Theory of Value is misleading. It is primarily interested in what a man ought to get in reward for his labour”. Both Lindsay and Laski were quite wrong. No such idea entered Marx's head and it is impossible even to guess what can have given Laski and Lindsay this strange notion.

Much has been made by critics of the allegation that in Volume I of Capital Marx put forward the theory that commodities exchange at value and then changed his mind and concluded in Volume III that some commodities permanently sell above their value and others below their value. The critics failed to notice Marx’s explanation in Volume I that he was first dealing with value and would later deal with its price form and that they were not identical. There was, for example, the footnote on page 244 of Volume I (Kerr edition):

The calculations in the text are intended merely as illustrations, and in them, therefore. it is assumed that prices are equal to value. In Book Three we shall learn that even in the case of average prices no such simple assumption can be made.

As for the critics' assumption that the alleged change of mind took place later, Louis Boudin pointed out that "most of the third volume, and particularly those portions of it which are supposed to modify the first Volume, were actually written down by Marx in its present form before the publication of the first Volume". (Theoretical System of Karl Marx, page 133.)

Cartoon by George Meddemmen.

Mention has already been made of the way in which the emergence of Keynes as the leading economist pushed into the background what Marx had written about unemployment and depression. The reason for this was obvious: if, as was almost universally believed, “full employment” was guaranteed for all time, theories about unemployment and depressions ceased to be of interest.

The almost total disregard of what Marx had to say about inflation is less easy to explain. That it should have been disregarded in this country in the period of nearly 100 years before 1914 when the gold standard operated is understandable, because there was no inflation. Why then has there been no interest in Marx’s explanation in the nearly forty years of continuous inflation since World War II? One reason is that, while much has been written about other aspects of Marx's writing, his economics have stayed out of favour even among many people who profess to be Marxists. A second reason is that many of the latter appear to be unaware that Marx had something to say about inflation. A third reason has been that when Keynesian doctrines began to fall into disrepute because of the failure of the “full employment" policy, attention went to the monetarists led by Professor Milton Friedman, who added to the confusion with his absurd remark that Marx, too, was a monetarist.

It is beyond dispute that the policies of Labour and Tory governments have led to the present price level being at least ten times what it was in 1945. (Prices have risen by over 50 per cent under the Thatcher government). It is also beyond dispute that all the governments up to 1979 have claimed to be following Keynesian policies; yet the Keynesian document, the 1944 Employment Policy endorsed by the Tory, Labour and Liberal parties in the national government, proclaimed the intention of seeking to maintain a “more or less stable price level". It is also true that while Keynes himself advocated short term use of inflation to reduce real wages in certain circumstances, his long-term aim was “allowing wages to rise slowly while keeping prices stable" (General Theory page 271). It is at least arguable that if Keynes had lived to see what was being done in his name he would have disowned it.

Why then have prices been rising continuously for over forty years? Marx’s answer would have been that it became a possibility with the abandonment of the gold standard in 1931, and became an actuality through the increase of the currency (notes and coin) in circulation with the public, from under £500 million in 1938 to nearly £11,000 million. The gold standard background is important. While the gold standard operated the pound sterling was. by law, a fixed weight of gold (about a quarter of an ounce). The effect was that the notes could never deviate, except marginally, from the value of the legally fixed equivalent weight of gold. As it was said at that time, "a Bank of England note is as good as gold", and it was everywhere accepted as such. Now the notes are “inconvertible" and their purchasing power steadily declines through excess issue.

Marx defined it as follows:

If the quantity of paper money issued were double what it ought to he, then, as a matter of fact. £1 would be the money-name not of a quarter of an ounce of gold but of one-eighth of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2. (Capital. Vol. I page 144 in the Kerr edition)

Several points have to be noted. What Marx meant by "what it ought to be" was the total quantity of gold that would circulate with a wholly gold coin currency. It was an application of his labour theory of value, gold having value like all other commodities. He was not saying (as did some quantity theorists) that any increase of inconvertible paper currency causes prices to rise. The rise occurs only to the extent that the quantity of notes is in excess of “what it ought to be". If, for example, production and population increase, the "necessary" amount of gold in circulation would increase. Other factors also affect this, including the tendency for the “necessary" amount of currency to decline with the development of transport and the banking system.

Marx also pointed out that there are other, "non-currency" factors, which affect prices, including changes in the value of commodities and the rise of prices in a boom and fall in a depression. (Also, while the gold standard operated, a fall in the value of gold would raise prices and a rise in the value of gold would reduce prices.) Marx made another valuable contribution to the whole issue of inflation and deflation. In accordance with his labour theory of value wages too are prices, the price of labour-power. So inflation which raises prices also raises wages. And deflation, which lowers prices, also lowers wages. Both situations are however affected by whatever ability the workers have to gain wage increases beyond the rise of other prices, or to prevent wages falling as much as other prices.

Some people have been misled by Milton Friedman's talk of controlling “money supply" into believing that he and Marx were thinking on similar lines. This is not so. Marx was talking about "currency", notes and coins, while Friedman’s doctrine is concerned with bank deposits, based on an old fallacy that the price level is related to the rise and fall of bank deposits. Keynes held the same view. In his Monetary Reform (1923 p. 128) he wrote: "The internal price level is mainly determined by the amount of credit created by the banks, chiefly the Big Five . . . The amount of credit, so created, is in its turn roughly measured by the volume of the banks’ deposits"

One last word about Keynes. Now that the Keynesians are in disarray perhaps some of them will look again at Keynes’ statement that Marx’s Capital was “an obsolete economic textbook which I know to be scientifically erroneous and without interest or application for the modern world".

Do they still find that convincing?

Edgar Hardcastle

[Invitation to “public figures” to give their views on Marx] (1983)

From the March 1983 issue of the Socialist Standard

The centenary of Marx's death is a time for his opponents to speak up. in line with the SPGB policy of constantly encouraging the anti-socialists to debate with us, the Socialist Standard wrote to a number of what are called public figures, inviting them to contribute their views on Marx for publication in this issue, with our reply. 

 

Most of them simply ignored us: Denis Healey (who once called himself a Marxist), Gerald Priestland, Lord Chalfont, Robert Conquest (who presumably prefers to put his views to the less rigorous readership of the Daily Telegraph), Piero Sraffa (who might have been expected to take this chance to display his alleged torpedoing of Marx's theory), Robert Miller, Francis Pym (too busy worrying about the Falklands?), Lord Carrington (too busy not worrying any more about the Falklands?), Peter Shore.

 

A few replied with a refusal to take up our offer:

Winston Churchill (". . . he does not wish to contribute. . .")

Norman St. John Stevas (". . . I am not able to make a contribution.")

The Archbishop of Canterbury (''. . . he simply does not have the time available . . .'')

Milton Friedman (". . . I am so heavily committed that there is no way I can contribute.")

Only two agreed to put their opinion: Tony Benn and Brian Crozier. We publish their contributions with our comments and leave our readers to draw their own conclusions about the reluctance of the anti- Marxists to slate their case when they have the chance.

Editors.

Proper Gander: The maxim of maximising (2025)

The Proper Gander column from the March 2025 issue of the Socialist Standard

In The Prophets of Profit, a five-part documentary on Radio 4, the BBC’s Business Editor Simon Jack ‘tracks how a simple idea became so powerful and why it shapes all of our lives today’. This idea is a common approach to running companies, and its ‘prophets’ are economist Milton Friedman and his successors. Being a radio programme, there aren’t any visual distractions to the words spoken by Jack’s interviewees or his explanations of the technicalities of commerce, which are more detailed than most documentaries bother with. However, this makes it harder to discern that buried underneath the talk of ‘maximising shareholder value’, ‘creative destruction’ and ‘equity-based compensation’ are the practicalities of goods being made and used by people.

The series takes 1970 as its starting point, when Milton Friedman’s article ‘The Social Responsibility of Business is to Increase its Profits’ was published in the New York Times. Clear from the title, Friedman’s ‘simple idea’ is that the main aim of corporate executives is to encourage profits, and any responsibilities a company has to wider society are covered by the wealth it generates. The documentary describes his influence through economists such as Michael C Jensen and Bill Meckling, who went from ‘disciples of Friedman to preachers for a new muscular brand of shareholder supremacy’, according to Jack. They, and those they inspired such as ‘corporate finance specialist’ Don Chew, believe that businesses have been held back by legislation and placing too much emphasis on cultural and environmental concerns or perks for staff such as pension schemes.

Chew quotes the view that ‘we’ve reached the point where every corporate interest is represented except for shareholders in the corporate boardroom’. To ‘correct’ this, executives should focus on directly maximising the value of shares, and this would lead to a better return on capital for shareholders than investment in wider issues. A sympathetic government would support this approach by minimising tax rates, regulation and legislation. Techniques to enhance share value which became popular through the 1970s and 80s included firms borrowing more to finance targeted growth, and ‘using cash generated by the business to buy back shares from existing shareholders so they can go and invest the proceeds in new industries’. Chew brags that Americans in particular have become adept at squeezing money out of failing organisations and in to growing industries, so the loss of one company means a boost to others. This is one application of ‘creative destruction’, a concept popularised by political economist Joseph Schumpeter, but which was earlier critiqued by Karl Marx. Those with an optimistic view of capitalism would say that overall this can lead to economic equilibrium, ignoring the hardships workers face when on the wrong end of ‘creative destruction’.

Maximising shareholder value also supposedly creates an equilibrium by being the most effective discipline to mould a well-run company for all, generating taxes for governments to spend while making innovative, decent products and happy workers. With this view, we’re expected to believe that wealth will trickle down to where it deserves to be. The series covers some of the actual consequences of the drive to raise shareholder value. Michael Jensen advocated ‘equity-based compensation’: executives being paid in shares to give them additional motivation to improve the company’s coffers. He didn’t foresee that many would be paid with salaries and bonuses as well, leading to a massive gulf between their income and that of most workers, nor that firms involved in scandals during the 2008 financial crash tended to have executives motivated by ‘equity-based compensation’. And as explained by economist Sir John Kay, a short-term focus on generating wealth can have disastrous effects, such as when crashes of Boeing’s 737 MAX aircraft were blamed on prioritising profits over investing sufficiently in safeguards.

The series uses the late-80s privatisation of the water industry as an example of Friedman’s ideas being put into practice in the UK. Michael Howard, the Tory Minister who oversaw this says that when owned by the state, the water industry had to compete for funding with other institutions such as the NHS. He claims that since privatisation, investment in the sector has always been higher than it was beforehand. However, in the ten years that Macquarie Group Limited owned Thames Water, it didn’t invest any of its own money in the business, which was sold off when in debt, with prices to customers subsequently raised. Sharon Graham, the General Secretary of Unite, is in favour of renationalisation, saying that water privatisation has led to poorly run services while shareholders have taken £72billion. As illustrated by Howard, though, being state-owned doesn’t mean that industries will be adequately resourced, or effectively managed either.

The impetus to maximise shareholder value has also led to ‘wasteful’ exercises such as American vehicle manufacturers buying steel from China rather than from more expensive local producers. This led to a decline in the American steel industry, which President Trump has said he’ll address by imposing tariffs on metal imports (presumably leading to ‘creative destruction’ elsewhere). Another example of Trump contributing to a change in what methods are seen as enhancing shareholder value is his dislike of ‘wokeness’ enabling companies such as Meta, Amazon, Walmart and McDonald’s to ditch their ‘diversity, equity and inclusion’ programmes.

The Prophets of Profit is timely in being broadcast during a shift back to the directions preferred by Friedman and his followers, especially in the USA. Much of episode four is an interview with Paul Polman, who took the opposing stance when he was Chief Executive of Unilever during the 2010s. Investing in staff and green programmes didn’t prevent Unilever’s returns to shareholders quadrupling in value during the decade Polman was in post. Maximising shareholder value was still the priority, though. This doesn’t really change, even if the most profitable approaches to achieve it alter over the years. The resurgence of Friedman-esque policies is a reminder that supposedly responsible business practices such as safeguards, regulation and workers’ rights can be lost as soon as they stop being compatible with the interests of the capitalist class.

Mike Foster

Friedman, Keynes and Marx (1978)

From the December 1978 issue of the Socialist Standard

The capitalist system operates according to definite economic laws which governments can neither change nor overcome; to the extent that they try to they generally make matters worse or create some new problem.

This view is quite at variance with the prevailing economic and political orthodoxy, which holds that government intervention in the workings of capitalism can ensure crisis-free growth and continuous full employment (Keynes) and that government action can eliminate poverty, bad housing, poor schools, inadequate health services, pollution and so on (reformism).

Fortunately not all teachers of economics are content to repeat parrot-fashion the theories of Keynes. Some have been prepared to examine the real world and so have not been able to avoid noticing the manifest failure of government intervention to do what the Keynesians and reformists said it would. This has led to a reaction, with a growing number of economists now arguing that the trouble stems from too much government intervention and calling for a return to what their mentor, the American Professor Milton Friedman, calls “competitive free enterprise capitalism”. Even Margaret Thatcher and Sir Keith Joseph have been toying with this suggestion.

They are wrong, of course. Pure private enterprise capitalism would be no better than the mixture of private and state capitalism we know today. But these economists can claim to have a better understanding of how capitalism works than the Keynesians and reformists, since they at least recognise that it operates according to economic laws which governments can’t change. As one advocate of laissez-faire capitalism, Nathaniel Branden has put it:

  All government intervention in the economy is based on the belief that economic laws need not operate, that principles of cause and effect can be suspended, that everything in existence is "flexible” and “malleable”, except a bureaucrat’s whim, which is omnipotent; reality, logic, and economics must not be allowed to get in the way (in Ayn Rand Capitalism: The Unknown Ideal, p. 79).

We couldn’t express it better ourselves! After all, it was Marx who spoke of “the natural laws of capitalist production” as being “tendencies working with iron necessity towards inevitable results” (1867 Preface to Capital).

Milton Friedman is the new star in the firmament of capitalist economics—he was awarded the Nobel Prize for Economics in 1976, effectively for having demolished the theories of Keynes—but there is nothing especially original about his work. All he had done is to observe how capitalism works and so has noticed that it doesn’t work in accordance with Keynes’ theories.

Take the question of inflation, for instance. Although Keynes at one time stated that over-issuing an inconvertible paper currency would inevitably lead to a rise in the general price level he later came to attach little importance to monetary policy, seeing its role as merely to ensure that enough money was available to finance the government spending which the tax and investment policies he advocated would involve. He thus provided an ideal theoretical justification for governments to finance their activities by recourse to the printing press. Which is what they have been doing in all countries since the war, with the inevitable result that prices generally have been constantly rising.

Friedman has merely done a bit of historical research to show the relationship between unwarranted increases in the money supply and rises in the general price level, enabling him to conclude that rising prices was bound to be the result of Keynesian policies and will continue to be as long as they are applied. In doing this “monetarists” (so called because they disagree with Keynes’ view that “money doesn’t matter”) like Friedman have rediscovered what Marx (and other economists of his time) had stated over a hundred years ago as being the inevitable result of over-issuing an inconvertible paper currency.

Keynes was also something of an “underconsumptionist” in that he thought that capitalism needed government spending to keep it going. His followers have favoured inflation, or more exactly government spending financed by inflating the currency, as a means of trying to reduce and avoid unemployment. But that inflation can reduce unemployment has proved an illusion, as the artificial inflationary boom gives way to the sort of "stagflation” or "slumpflation” we now have, where widespread unemployment and a high rate of price rises exist side by side.

Observing this phenomenon, Friedman has applied a bit of logic and come to the conclusion that the business cycle of boom-slump-boom-slump is independent of inflation, that inflation is not a way of ensuring a permanent boom but merely results in prices rising in all stages of the cycle, during the slump as well as during the boom. Thus the choice is not, as we are always being told by government ministers, Labour and Tory, between inflation and unemployment. The level of unemployment is governed by factors other than inflation, which is essentially a monetary phenomenon independent of the real economic forces which cause unemployment to exist and to rise and fall. This "discovery” of Friedman’s has long been known to socialists though no one thought of proposing us for a Nobel Prize! Even Friedman’s general conclusion on Keynesianism—that the monetary mismanagement it involves has probably aggravated rather than stabilised the capitalist business cycle — was anticipated by Marx, who recognised that monetary bungling could aggravate a crisis originally caused by other factors.

In his book Capitalism and Freedom (1962) where he expresses in simple language his philosophy of “competitive free enterprise capitalism”, Friedman shows how reformist policies aimed at trying to abolish poverty, equalize incomes, eliminate bad housing, have failed just as miserably as Keynesianism:

  Which if any of the great ‘reforms’ of past decades have achieved its objectives? Have the good intentions of the proponents of these reforms been realized? (. . .) An income tax initially enacted at low rates and later seized upon as a means to redistribute income in favour of the lower classes has become a facade, covering loopholes and special provisions that render rates that are highly graduated on paper largely ineffective (. . .)
  A housing program intended to improve the housing conditions of the poor, to reduce juvenile delinquency, and to contribute to the removal of urban slums, has worsened the housing conditions of the poor, contributed to juvenile delinquency, and spread urban blight (. . .)
   Social security measures were enacted to make receipt of assistance a matter of right, to eliminate the need for direct relief and assistance. Millions now receive social security benefits. Yet the relief rolls grow and the sums spent on direct assistance mount.

After mentioning some exceptions of where he thinks government intervention has led to some improvement (such as building roads, providing basic schooling, public health measures) Friedman concludes:

  If a balance be struck, there can be little doubt that the record is dismal. The greater part of the new ventures undertaken by government in the past few decades have failed to achieve their objectives.

Up to this point Friedman is saying much the same as we have done: that social reforms don’t work. But Friedman is not a socialist and does not draw the conclusion we do: that this proves that capitalism is a system which does not work and cannot be made to work in the interest of the wage and salary earning majority. He thinks that if there were less government intervention then capitalism would work to everybody’s benefit!

This conclusion is of course mistaken and arises from recognising as inexorable only one of capitalism’s economic laws: the law of profits, which decrees “no profits, no production”. People like Friedman can easily see that anything that interferes with profits, generally or in a particular industry, will inevitably lead to a drop in production, so making maters worse. But there is another economic law of capitalism which the advocates of private enterprise capitalism ignore: the law of wages, which decrees that the consumption of the class of wage and salary earners is determined by what is necessary to keep them in a fit state of work and to enable them to raise and maintain a family, and that everything they produce over and above this is appropriated as profits by those who own and control the means of production and distribution. Capitalism is thus based on the exploitation and restricted consumption of the working class and, whatever the degree of government intervention, can never work in their interests.

There is another fundamental difference between Friedman and socialists. Although recognising the failure of social reforms he is himself a sort of reformist in that he is proposing changes in capitalism as it exists today in order to achieve his ideal of a "competitive free enterprise capitalism”. The concern of socialists, on the other hand, in the field of economics is to understand capitalism, to “lay bare the economic law of motion of modern society” as Marx put it, and not at all to prescribe economic policies for governments to follow.

The rise of Friedmanite economics, for all its faults and shortcomings, does however represent a return towards the more realistic view of the way capitalism works. Before Keynes, this view was held by a number of capitalist economists, and the demonstration that planning and social reforms don’t and can’t work may be unpalatable for economic “experts” and reformist politicians.

Adam Buick

Neo-Liberalism: Old Religion Repackaged (2019)

From the December 2019 issue of the Socialist Standard

It’s not neo-liberalism that’s to blame – it’s capitalism

In Marx’s day the doctrine that the government should not interfere in the operation of the capitalist economy was known as ‘Manchesterism’ after the city in the north of England where capitalist industry was then most developed and whose capitalists wanted to be free to pursue profits as they thought fit.

Its advocates preached ‘free trade’ (the abolition of tariffs on imported goods and bounties on exported goods) and letting market forces operate freely. They even opposed laws against adulteration and to limit the hours of work of those they employed. Also known as ‘economic liberalism’, it had roots in the eighteenth century in French manufacturers and merchants who told the royal bureaucracy to leave them alone and let them get on with their business (‘laissez faire’) and in Adam Smith’s curious theory that behind market forces was some ‘invisible hand’ ensuring that these operated for the common good.

However, a practical problem soon arose over industries and services which all capitalist businesses had to make use of, such as transport (roads, canals, railways) and communications (post, telegraph). Capitalists did not want these to be in the hands of any one group of their number who would thereby be in a position to hold the rest of them to ransom and charge monopoly prices. This was why in Britain, as early as 1844, a Railways Act contained a clause providing, if need be, for state ownership, so-called ‘nationalisation.’ In Europe railways had been in the hands of the state almost from the beginning because of their strategic importance for transporting troops in times of war. In the event Britain settled for price regulation by the government, which was also a violation of laissez faire.

Economic liberalism never caught on in its entirety outside Britain as ‘free trade’ was seen, not without justification, by rival capitalists in other countries as a means of giving British capitalists a competitive advantage. They demanded that their governments ‘protect’ them from such competition through tariffs on imported British goods. Beyond that, however, they embraced the doctrine that governments should not interfere with their pursuit of profits.

Enter Keynes

Between the two world wars of the last century even Britain abandoned free trade and the gold standard. An era of government-created fiat money opened up, in which governments had to pursue an interventionist policy to manage their currency. With the financial crash of 1929 and the big slump in production that followed, governments also came under pressure to intervene in the capitalist economy to try to get it expanding again. ‘Public works’ programmes were initiated, such as Roosevelt’s New Deal in the USA and Hitler’s rearmament in Germany. In his 1936 General Theory of Employment, Interest and Income the British economist John Maynard Keynes provided a theoretical justification for such ad-hoc schemes. He argued that left to itself – laissez faire – capitalism would not necessarily recover from a slump of its own accord, as economists had preached till then, but that government intervention, in the form of a tax policy to stimulate demand was required. In the event of a boom, this could be prevented from ending in a slump, as booms had previously always done, by the government pursing the opposite policy of using taxes to discourage consumption. Thanks to government intervention, steady capitalist expansion could be engineered.

Naturally this theory, especially stimulating demand in a slump by redistributing purchasing power from the rich to the non-rich, was acclaimed by reformists as a justification for the reforms they already favoured. Those that had still regarded themselves as in the Marxist tradition abandoned Marx for Keynes.

Keynesianism was not consciously pursued as a government policy till the beginning of the Second World War. When that war was not followed by a slump, as the end of the First World War had been, but by a 25-year period of capitalist expansion with only minor ‘recessions,’ many open supporters of capitalism hailed Keynes for having saved capitalism.

But this was an illusion. Put to the test when the post-war boom came to an end in the 1970s, Keynesian policies resulted in what was called ‘stagflation’ – a rise in the general price level while the economy remained stagnant. The post-war boom had been caused by other factors such as reconstruction and the spontaneous expansion of internal and world markets.

Exit Keynes

The end of the post-war boom led to what was called a ‘fiscal crisis of the capitalist state’. Governments depend for what they spend on levying taxes, which ultimately fall on capitalist profits, and on borrowing money from those who have it. With less profit being made, there was less to tax and less to borrow. Government had no alternative but to cut their spending rather than increasing it as Keynes had advocated they should do to get out of a slump. Another economic theory was required to replace Keynesianism and justify this.

The new theory, popularised by the American economist Milton Friedman, called itself ‘monetarism’ as it advocated a tight monetary policy, i.e. cutting government spending, and letting market forces revive the capitalist economy by restoring profitability of its own accord as asset prices and real wages fell. This was not really a new theory but a revival of pre-Keynesian economic liberalism.

There is some justification, then, for calling this replacement policy ‘neo-liberalism.’ What is not justified is seeing its application as a free choice on the part the part of governments. It was something imposed on them by the workings of the capitalist economy, given the situation it was in. Governments had no choice but to apply it. In other words, capitalism was the cause, with neo-liberalism merely the political and ideological justification.

What the capitalist conditions imposed was that governments should cut their spending or, rather, cut taxing profits with the result that they had less to spend. With less to spend, ‘austerity’ was the order of the day in all countries irrespective of the political colour of their government. It was not just Reagan and Thatcher in the USA and Britain but also Mitterrand in France. Public services were cut back. ‘Welfare’ and ‘benefits’ were slashed, especially for those who for one reason or another were not able to find a job. Since the economists preached that there was a so-called ‘natural rate of unemployment,’ which could be as high as 6 percent, millions of already poor people had their standard of living reduced even further. Other reforms enacted during the post-war boom were whittled away or rolled back.

To reduce their borrowing, governments sold off state assets to private capitalist firms, who were granted the right to make profits from them in return for themselves raising the capital to finance them.

As a policy of trying to ensure steady sustained capitalist development, neo-liberalism has been just as much a failure as Keynesianism was, as spectacularly shown by the Crash of 2008 and the Great Recession that followed. What this showed is that, no matter what policy governments adopt, capitalism goes relentlessly on its way, repeatedly going through the boom/slump cycle that it has done since the 1820s. The fact is that governments do not – cannot – control the way the capitalist economy works. It is the other way round. It is the operation of capitalism that constrains what governments do; all they can do is little more than react to what capitalism throws at them. There is a sense in which they do have a choice. They could choose to try to defy what capitalism’s economic forces dictate but, if they do, they will make matters worse. As Marx pointed out with regard to banking legislation, while governments cannot make things better, they can make things worse:

  ‘Ignorant and confused banking laws, such as those of 1844-5, may intensify the monetary crisis. But no bank legislation can abolish crises themselves’ (Capital, Volume 3, Chapter 30, Penguin Books edition, p. 621).

This warning is apt because left-wing populists are calling for neo-liberalism to be replaced by government intervention to spend money to end austerity and get capitalism expanding again – a revival of Keynes’s discredited idea that could be called ‘neo-Keynesianism.’ As Marxists know, both from the past experience of such attempts and from a knowledge of how capitalism works, this is doomed to fail and would make things worse.

It is not neo-liberalism that is the problem, but capitalism. It is not a change of policy that is required, but a change of socio-economic system.

Adam Buick

The Slump Deepens (1971)

From the December 1971 issue of the Socialist Standard

Nobody knows how deep the present depression will go, how far it will spread and how long it will last, but there are plenty of ominous signs. At first, some two years ago, the British Press had its eyes on growing trade and unemployment difficulties in America, then it became apparent that conditions were rapidly worsening in Britain. Now we read reports of troubles in Japan and the countries in the Common Market. The Observer (7 November) under the heading “Fear and Depression hits Europe” reported:

Western Europe has been seized by recession jitters. The economics of the main industrial returns are still far from a crisis situation, but bankers and industrialists in France, West Germany and Italy are intensely alarmed by the outlook for 1972.

The government here tries to stimulate optimism by declaring that we are on the verge of big expansion, but, as the Times recalls in its issue of 5 November, the Chancellor of the Exchequer was making the same kind of hopeful forecast exactly a year earlier. This is the common pattern of all the recessions capitalism has ever had. Nixon’s government was also a case in point. First the promise that there would be no recession, then the denial that it had begun, then the late admission that it was a little one and would soon be over and finally the complete reversal of policy by his government in August last—a clear confession that the policy that was to have solved the problem had in fact not worked.

The First National City Bank of New York, in their monthly Economic Letter, were caught napping by this. They were so impressed by an article written by Paul W. McCracken, Chairman of the Council of Economic Advisers, in which he explained “clearly and persuasively” why the Nixon government would not adopt the Galbraith policy of imposing controls on prices and wages that they re-published the article in their August issue; only to find that by the time it was in print the Nixon government had imposed a 90 day freeze on prices and wages, to be followed by a policy of “guide lines”.

This policy of controls was reported to have been well received, apart from a certain amount of trade union mistrust, just as the Heath promise to curb price rises helped him to win the Election in June 1970.

Most people believe that things would be better and life would be easier if only prices were stabilised or reduced. This is a complete illusion, a failure to understand how capitalism works. To start with nobody actually wants all prices to be reduced: what they all want is that the prices of the things they buy should be reduced and the prices of the things they sell kept as they are or increased. This includes the workers, none of whom want to see a reduction of their wages —which also are prices, the prices at which they sell their mental and physical energies (their labour power) to the employers. The workers also want “full employment”.

Here they come up against the cruel truth about capitalism. The employers have paid off hundreds of thousands of workers because at present selling prices and costs of production (including wages) they cannot make a profit. If they saw the prospect of a profit they would re-engage them to-morrow. From the employers’ point of view the solution lies in raising their selling prices, or reducing costs, including wages, or cutting their total costs by getting the same amount of work out of fewer workers. All of this is subject to the overriding condition that the goods produced can be sold, and at the present time world markets are shrinking and competitors abroad are also trying to cut their costs.

Though it had not attracted much general attention some prices have been falling, notably the metals copper, aluminium, antimony, silver. The price of copper has fallen from about £700 a ton early in 1970 to about £400—due to overproduction. It is being met by agreement to curtail production, with a consequent increase in unemployment. If the depression deepens and extends generally to other countries all prices could be stabilised or actually fall. Capitalism is behaving normally, going through its phases of expansion, boom, crisis and stagnation just as Marx depicted it a century ago. What has obscured the effect of these phases is that governments have superimposed on the normal workings of capitalism a steady depreciation of money itself.

This has led monetary economists such as Milton Friedman to offer as a remedy a curtailment of the increase of the money supply and a consequent restriction on the general rise of prices. It would not solve the problem of capitalism’s alternating expansion and contraction. Capitalism works like this at any price level, high or low. In the years 1920-1924 prices fell by a third and wages by rather more, with unemployment reaching peaks of over 2½ million in 1921 and 1933 and never falling below a million.

Would any of the various forms of controls of prices and wages avoid depressions? The answer is that every possible variety has been tried and failed. What is happening now is that the governments are shopping around, as is Nixon’s trying the cast-off methods which have been used elsewhere. All the short lived “miracle” countries are in the same situation. No longer do we hear about the Japanese miracle, the French miracle, the German miracle and so on.

The latest to start moving into depression is Sweden, just when John Davies, Secretary for Trade and Industry gave an interview in the Director (November) saying that he rather liked the Swedish version of incomes policy even though it wouldn’t be practicable in this country at present.

In this country some form of incomes policy has been tried half a dozen times by Labour and Tory governments since the war and all have failed and been abandoned.

The last was the Labour government’s imposition of a “standstill” for six months in 1966, followed by six months “severe restraint”. (This policy was imposed only four months after the General Election of March 1966 without any mention in the Labour Election Manifesto that it was intended). It completely failed to prevent prices and unemployment rising, and the Heath government have been even less successful.

It may be hard to accept but is nevertheless true that there are no ways, with or without an ‘incomes’ policy, to prevent capitalism from behaving in accordance with its own economic laws.

Edgar Hardcastle

From Marx to Milton Friedman (1970)

From the November 1970 issue of the Socialist Standard

During the six years of the 1964-70 Labour government, two developments were going on in the field of economic theory; on the one side confidence in a government’s ability to “manage the economy” was being undermined by the series of crises and the rise of prices and unemployment; on the other a big offensive was being mounted by monetary economists against the Keynesian ideas on which the Labour government’s policies were based. The two trends came together in the declaration made on 19 May 1969 by Roy Jenkins, Labour’s Chancellor of the Exchequer, that his priority was not expansion of production and employment, as his supporters would have wished, but dealing with the problem of “too much money” in the economy.

Prominent among the monetary school is Professor Milton Friedman of Chicago University, whose lecture, “The Counter-Revolution of Monetary Theory”, was reproduced in the Financial Times  (7 September). It should be noted that Friedman said he was attacking Keynes’ followers not Keynes himself. Indeed he claimed that Keynes, if still alive, would, in present circumstances, be in the forefront of the counter-revolution.

Among the many aspects dealt with by Friedman the two most interesting were his treatment of inflation and his own idea of how a government should try to manage capitalism.

On the first he declared:

  “Inflation is always and everywhere a monetary phenomenon – in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

At first glance it may seem that Friedman was merely restating the view held in the past by economists as diverse in their approach as Marx, Cannan and Keynes, that if an inconvertible currency (such as exists now) is issued in excessive amounts this causes a proportionate rise in the general price level. There is however a variation of terms that should be noted. These three economists were talking specifically of currency (notes and coin) while Friedman was talking of currency plus bank deposits. (Current use of the term “money”is so variously defined that the government central statistical office now has three different calculations of the money supply).

In practice no doubt the Friedman “money” view of inflation comes back roughly to the currency view because any policy of controlling “money supply” would in the last resort entail also control of the currency issue. Most economists follow Friedman in including some or all of bank deposits in their conception but among those who after the war continued to deal with inflation specifically in terms of currency was Sir Arnold Plant, Professor of Commerce in the University of London. He declared that “all our troubles arising from the present inflationary position would cease as soon as a British government decided to accept the full responsibility of their position as the sole controller of currency issues”. He wanted an absolute ceiling to be placed on the total currency issue (The Times, 1 June 1956).

In order to understand the attitudes of Friedman and Keynes (and Marx) it is essential to separate the question of inflation (currency depreciation) from the question of the possibility of managing capitalism. Keynes was not an advocate of currency depreciation for its own sake, though he did rely, as a method of handling certain situations, on his belief that workers who would strike against a reduction of money wages could be induced to accept a fall of real wages through a rise of prices (The General Theory, p.9).

Keynes’proposition was that no control of the currency issue was necessary because if the monetary authorities looked after bank lending (“the creation of credit”) the creation of currency could be left to follow suit (Tract on Monetary Reform, p.184).

When Keynes declared his belief that formal control of the currency issue was unnecessary Professor Cannan immediately raised the alarm. He said that experience showed that unless there was some form of control governments would always succumb to the temptation to depreciate the currency, with its consequent rise of prices. In fact currency in the hands of the public has increased from £449m in June 1938 to £3,107m in June 1970. Such a rate of increase was never intended or anticipated by Keynes. Friedman is now saying that some control is necessary. He wants the increase to be limited to a steady 4 or 5 per cent a year.

   “A steady rate of monetary growth at a moderate level can provide a framework under which you can have little inflation and much growth. It will not produce heaven on earth. It will make an important contribution to a stable economic society.”

If Friedman’s lecture is compared with the 1944 White Paper Employment Policy, which was the agreed three-party statement on how Keynesian doctrines were to be applied after the war, it will be seen that Friedman’s other main criticism was of the belief that interest rates could be kept down by government policy and that this could be an effective instrument for controlling economic affairs. Bank rate under the Wilson government rose to the highest level for a century and Friedman argues that the excessive rate of growth of the money supply is a contributory factor in high interest rates.

That 1944 statement showed how the government would iron out the ups and downs of overexpansion and depression by varying interest rates, by alternately increasing and decreasing government and private capital investment and by increasing and decreasing the market for consumer goods, and at the same time aim at “work for all“, stable prices and continual expansion of production and a rising standard of living. It has failed in most of its objectives.

What are the prospects that Friedman will do any better? He is of course more moderate in his claims. He appears to think that under his proposal British experience will come more into line with American. It would seem that he is not expecting much; indeed it may well be he expects the already rising unemployment in Britain to reach the higher level that has prevailed in America in recent years.

There is no reason at all to suppose that his moderate and controlled inflation will get rid of the cycle of expansions, crises and recessions than did the more rapid inflation of post-war Britain, or the long period without inflation in the 19th century.

Marx never supposed that capitalism could be made to work smoothly and neither Keynes nor Friedman has shown how capitalism can do without unemployment to provide an industrial reserve army and keep wages down to a level profitable to the capitalist. It is true that post-war governments thought they had found a substitute in the form of an incomes policy and wage restraint but it came up against working class resistance they never expected.

Incidentally in all the plausible plans of the 1944 statement there was not a word about having to include such a policy.

Edgar Hardcastle

Economists' bunk exposed (1984)

From the March 1984 issue of the Socialist Standard

With understandable glee the Keynesians have greeted an attack on the monetarist doctrines of Professor Milton Friedman by Hendry and Ericsson, which, according to the Guardian (15 December 1983), is to be published by the Bank of England. The Guardian had two articles on it, both by Christopher Huhne — “Monetarists' Guru Distorts His Evidence”, and “Why Milton's Monetarism is Bunk”.

The articles set out at length the case against Friedman and include the statement that he had been supplied with a copy ‘two months ago, but has not yet responded'. The authors of the attack do not themselves claim that it destroys the monetarist case; only that the evidence on which Friedman has relied to support it is grossly defective. It will still be open to Friedman to present other evidence. Whether or not Friedman succeeds in rebutting the attack is of great importance to both the Keynesians and the monetarists but it need not concern us. Monetarist doctrine is indeed wholly fallacious, but for quite a different reason, and it did not have to wait for the publication of the new attack. It was for example dealt with in the Socialist Standard in January 1983. What does matter is whether Marx’s explanation of the several factors which determine the price level, and its rises and falls, is correct.

One red-herring trailed by Friedman has first to be disposed of, that is his nonsensical claim that Marx was a monetarist. In an interview in the Observer (26 September 1982) Friedman said: “Let me inform you that among my fellow monetarists was Karl Marx”. He explained how he arrived at this conclusion.

  Monetarism . . . was a new name for the Quantity Theory of Money which dealt with the relationship between the quantity of money and economic variables such as price level, interest rates and unemployment.

Marx did not suggest that unemployment exists because of variations in the quantity of money. In a broad sense any theory which deals with the quantity of money could be called a “quantity theory", but there was not, as Friedman implies, just one such theory. There were a number of different theories. Marx’s was unique to him and was rejected by adherents of the others. All that the Friedman interview does show is his ignorance of Marx's economics.

Marx's explanation of what determines the prices of individual commodities and what determines the general price level and its changes, involves a number of different factors: the commodity’s value (amount of labour socially necessary for its production); day-to-day fluctuations of supply and demand; the rise of prices in booms and their fall in depressions; monopoly; and, where the gold standard was in operation, changes in the value of the money-commodity, gold. In the last half-century in this country the prices of some commodities have been affected by government subsidies, which enable them to be retailed at prices below what would otherwise be their market prices.

When the British gold standard operated in the nineteenth century the paper currency (Bank of England notes) was, by law, tied to a fixed weight of gold (the pound was about ¼oz of gold). The notes could be exchanged, on demand, into the fixed weight of gold, and gold into notes. The consequence was that the purchasing power of the notes was always (except for marginal, temporary deviations) the same as that of the fixed weight of gold. There could never be a rise of prices resulting from depreciation of the notes (inflation). The price level in 1914 was almost exactly the same as in 1850, though there had been moderate rises in booms and falls in depressions in the intervening years.

With the abandonment of the gold standard in 1931 the paper currency ceased to be tied to a fixed weight of gold. It could be, and has been, massively depreciated through excess issue. The notes in circulation. under £500 million in 1938, now total over £11,000 million. The continued inscription on the £1 note, "I promise to pay the bearer on demand the sum of one pound”, is now entirely meaningless. The excess issue of notes since 1931 has been the major cause of the massive increase in the price level.

Marx dealt with this situation:

  If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current it will (apart from the danger of falling into general disrepute) represent only that quantity of gold which, in accordance with the laws of the circulation of commodities, is actually required, and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance. double what it ought to be, then, in actual fact, one pound has become the money name of about ⅛ of an ounce of gold instead of about ¼  of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price £1 will now be expressed by the price £2. (Capital Vol. I Allen and Unwin edition, pages 108-9)

It is important to notice that Marx was not saying (as did some quantity theorists) that any increase of paper money causes prices to rise: only if it is in excess of the gold coins that would circulate. With the expansion of total production the necessary amount of gold coins would rise, as it did in the nineteenth century, with a consequent increase in the Bank of England notes without any rise of prices. Marx also pointed out that with the development of the banking system and greater use of cheques, the necessary amount of gold coins increases less fast than the increase in the volume of transactions having to be handled.

In the half century of excess issue of paper money and consequent inflation, the other factors named by Marx as affecting prices have of course continued to operate.

Where then does Marx’s explanation of inflation differ from Friedman’s theory that prices rise as a result of an increase in the amount of “money”? The explanation is that for Marx “money” meant notes and coins and nothing else. For the Friedmanites (and also for the Keynesians) “money” includes bank deposits and is predominantly made up of bank deposits. The Bank of England currently publishes half a dozen different figures for the amount of “money”, varying in size according to whether they include some or all of bank deposits, and whether they include deposits in paper money or only deposits in sterling. Some of the Bank's figures also include investments and deposits in the building societies as part of “money". Marx would have rejected all of them, as being quite irrelevant in relation to the determination of the level of prices.

So how do bank deposits come into the monetarist and the Keynesian theory of prices? Both schools are adherents of the “bank deposit theory' of prices", according to which the price level is determined by the size of bank deposits. It was stated by Keynes in his book Monetary Reform (1923, page 178).

  The internal price level is mainly determined by the amount of credit created by banks, chiefly the Big Five . . . the amount of credit, so created, is in its turn roughly measured by the volume of the banks' deposits.

Since 1977, when the Labour Government announced its intention to curb inflation by “controlling the money supply” (the policy continued by the Thatcher government), what they thought they were doing was to halt the rise of prices by controlling the size of bank deposits.

But why should the price level be affected by the size of bank deposits? The man who deposits £1,000 in a bank has the option of doing that, in which case the bank lends or spends the £1,000. or of lending or spending it himself. Why should the effect on prices be any different whichever option he chooses? The answer to this question is that the monetarists, and the Keynesians, both belong to what the late Professor Edwin Cannan so aptly described as “the mystical school of banking theorists”, the school which believes that the banks “create deposits” and thereby increase purchasing power and so increase prices above what they would otherwise be.

The banks don’t create anything. They merely lend or spend or keep in their vaults, whatever sums depositers choose to lend to them in the form of deposits — that and no more. Keynes (in the Report of the Macmillan Committee 1931, page 36) claimed that “the bulk of the deposits arise out of the action of the banks themselves”. The monetarist Milton Friedman holds the same “mystical” view. In his Free to Choose (Pelican Books. 1980, page 298) he claimed that, while the banks cannot print “the pieces of paper we carry in our pockets”, they can , and do “authorise a book keeper to make entries in ledgers, that are the equivalent of those pieces of paper”. Major Douglas, founder of the Social Credit movement, put the same daft view in his statement: “the banks have the power to create untold wealth by the stroke of a pen”.

There is abundant evidence over the years which shows that the theory that prices are determined by the size of bank deposits is fallacious; though there is sometimes the appearance of a reverse link between prices and bank deposits, in the form that when prices rise bank deposits sometimes show a rise, because people have larger money increases out of which to make deposits in banks. Neither the monetarists, nor the Keynesians, nor anybody else, have ever succeeded in showing that Marx’s statement of the several factors which affect prices is invalid.

One last note on the Guardian articles, which includes the remark: “a Treasury spokesman said last night that the Government had no intention of changing its monetarist policy”. One apparent change of intention has taken place. In the 1979 Tory election programme policy was defined as that of "controlling the money supply” (that is bank deposits). In the 1983 Tory programme the words were altered to read: “We shall continue to set out a requisite financial strategy which will gradually reduce the growth of money in circulation”.

On the face of it the reference to “money in circulation" might be taken to mean restricting the printing and circulation of the note issue, and the Bank of England has now added to its collection of definitions of “money” a new one called M nought (M0) circulation of notes and coins only.

In 1919 the Government did instruct the Bank of England to reduce the amount of notes in circulation, and niillons of pounds of notes were burned. Inflation was not only halted, but prices fell drastically. So far there is no sign that the Thatcher government intends to repeat that action, for the notes in circulation have continued to increase.

Edgar Hardcastle

Failure of Keynesian policies (1983)

From the April 1983 issue of the Socialist Standard

In the depression of the thirties, with unemployment rising to peak levels and governments toppling because of their inability to do anything about it, most economists and many political parties were overjoyed to adopt the theories of J. M. Keynes, which held out to them the guarantee that capitalism's principal troubles were over. This is not surprising since Keynes promised continued full employment — the end of depressions with their accompanying massive demonstrations of working class discontent, the removal of one of the causes of war, and the arrival of lots of other good things. Keynes, they said, had revolutionised economic thought, blotted out the growing interest in Marx’s theories, and made capitalism safe. In 1944 the three parties. Tory, Labour and Liberal. all part of the war-time National government. formally endorsed the main Keynesian doctrines in the government White Paper, Employment Policy, which set out the principles to be followed by post-war governments.

The attitudes of the three parties have partly changed since then. While the Labour Party, the Liberals and their allies the Social Democratic Party are still unrepentant Keynesians — as also are some Tories—the main body of the Tories, under Thatcher's leadership, have thrown Keynes over and adopted the theories of Professor Milton Friedman.

Some leaders of the Labour Party went through a phase of doubting their saviour when Callaghan the Labour Prime Minister and Healey the Chancellor of the Exchequer adopted the “monetarist” policies now followed by the Thatcher government. It is for this reason that the present leader of the Labour Party, Michael Foot, gives 1976 as the date of the abandonment of those Keynesian principles which, he says, "for a quarter of a century or more, worked with such beneficial effects" (New Statesman, 26 November 1982).

The Keynesian argument is that if the demand for goods is maintained at a high level, industry is kept busy and unemployment will remain low. The "demand management" cure for rising unemployment is therefore for the government to increase its expenditure and investment, meeting the additional cost by borrowing: this will, the Keynesians say, increase the number of jobs. It is crucial for the Keynesian argument that the increase of government expenditure and investment should not be offset by a simultaneous fall in the investment by private industry. The Keynesians claim indeed that increased expenditure by the government will positively stimulate investment and activity in private industry.

The Keynesians have an early showpiece, supposed to vindicate Keynes, in the Roosevelt New Deal in America. A Keynesian admirer of the New Deal is Dudley Dillard, sometime Professor of Economics at Maryland University who wrote about it in his The Economics of J.M. Keynes (Lochwood & Son, London. 1948). In his book Professor Dillard compared the Keynesian policy of the New Deal with what happened in Great Britain at the same time, under the anti-Keynesian National government. His specific claim for Roosevelt is:

The economic expansion between 1933 and 1937, despite occasional minor relapses, was one of the most rapid in the history of American business cycles. The speed of this recovery was undoubtedly conditioned by the depths to which activity had plummeted in 1932. It was, nevertheless, a remarkable recovery which was nurtured by fairly large-scale loan expenditure (p. 127).

So how successful was the New Deal with its Keynesian policies? Unemployment in America was 24.1 per cent in 1932, the year when Roosevelt became President, and 25.2 per cent in 1933. By 1937 it was down to 14.3 per cent, though it rose again in 1938 to 19.1 per cent, which is nearly double what it is in America in 1983. In Britain at the same time, with a government running a non-Keynesian policy, unemployment fell from 22.1 percent in 1932 and 19.9 per cent in 1933 to 10.8 per cent in 1937. and it was 13.5 per cent in 1938. So, as Marxist theory would lead us to expect, the trend of unemployment was much the same whether the policy was Keynesian or not.

And what about the Keynesian argument that increased government expenditure stimulates private industry? In the pre-depression year. 1929, “government expenditure, including capital expenditure” was $22 billion, and “gross private domestic fixed investment” was $39.5 billion. In 1938 the former had risen to $34.2 billion but the latter had dropped to $21.5 billion. As the one went up and the other went down. Dillard admits that private investment “remained abnormally low". He and Keynes met this with the plea that it might have been different if the Roosevelt government had increased its expenditure still more. It is difficult to counter arguments of the “what might have been" variety, but it is worth remembering that in Germany where the government in 1920 not only increased expenditure but multiplied it enormously (also in the belief that it would create jobs) in 1923 about 25 per cent of the workers were out of work and nearly as many again were on short time.

Michael Foot believes that Keynesian policy was a success for 1945 to 1976 in Britain. But did it work as he thinks it did? Unemployment for years after 1945 was abnormally low. In fact it was considerably lower than Keynes expected from his Full Employment policy. But was it the result of Keynesian policy? One Keynesian, Joan Robinson, in her Problems of Full Employment (1950) said it was not. “Employment after the war would have been high in any case.”

Another Keynesian, Alvin Hansen, in his Guide to Keynes (1953) said the same: “Full employment was however primarily the result of the war and post-war developments, not of consensus policy”. And Aneurin Bevan, Minister in the Attlee government, attributed the low unemployment to Marshall Aid. These hundreds of millions of dollars enabled British industry to obtain materials the lack of which was hampering production. Bevan said, in 1948: “Without Marshall Aid unemployment in this country would at once have risen to 1½ million.”

So it wasn’t Keynes but Marshall and the American government who kept unemployment abnormally low for some years after the war. From the mid-fifties until 1976, in spite of Keynesian policies, unemployment has been on a more or less continuous upward trend. It touched 575,000 in 1958, 747,000 in 1963, a million in 1972, and 1½ million in 1976, and so on to the present 3⅓ million. Keynesian policy had nothing to do with the very low unemployment in the early post-war years, and nothing to do with the subsequent steady increase.

A major factor was first, the war-time destruction in Japan, Germany and some other countries which pul them for all practical purposes out of the world market, and later on their return to the world market in strength after their industries had been rebuilt and modernised, largely with American finance. They came back as cheap producers able more and more to undersell British products.

In 1955 British capitalists’ share in world exports of manufactured goods (based on 11 industrial countries including Japan and Germany) was 19.8 per cent. It had dropped to 13.8 per cent in 1965 and to 10.6 per cent in 1970. The fall has continued so that for the first time British imports of manufactures now exceed exports. And with this change of conditions unemployment in Britain went on rising, well before the start of the great depression in 1979. So Keynesian “demand management” is based on fallacious theory and its two showpieces, Roosevelt’s New Deal and Foot’s golden age of 1945-76, demonstrate that it does not work.

Two other aspects of the doctrine deserve mention. The 1944 White Paper looked forward to more or less stable prices, and Keynes himself looked to slowly rising wages “while keeping prices stable" (General Theory, p.271). What we got was continually rising prices, so that the level in 1976 was more than four times what it had been in 1945.

Lastly. Keynes held that many wars are caused by “the competitive struggle for markets” and they would be ruled out by the adoption of his full employment policy (General Theory, p.381). It is therefore interesting to notice that the Labour Party, Liberal Party and Social Democratic Party, while all professing to accept Keynesian policies, are all busy with schemes for increasing the competitiveness of British exports against foreign rivals, by such devices as lowering the exchange rate of the pound. In the House of Commons on 10 November 1982 Roy Jenkins, Leader of the SDP, said that “Britain’s lack of competitiveness was the central problem requiring solution”, and he agreed with the Labour Party spokesman, Peter Shore, that “a reduction in the exchange rate could make an important contribution".

According to Keynes, his full employment policy makes it unnecessary to go in for the war-promoting, competitive struggle for markets. Is the explanation that the three Keynesian parties do not now believe that full employment works, and are hanging on to it only because they have to oppose Thatcher’s policies and believe that the empty promise of full employment may still be a vote-catcher at the next election?

Edgar Hardcastle

Chinese copy (1989)

From the January 1989 issue of the Socialist Standard

The government starts selling off state-owned houses to their occupiers, as a means of raising income and giving people incentives to improve their homes. At the same time it fights inflation and puts limits on government spending. No, this is not Thatcherite Britain but capitalist China, where all too familiar economic problems exist. Nor is the comparison with Britain an unwelcome one, as People's Daily has sung Thatcher's praises and commended her personal willpower and reliance on individual responsibility. China's own version of perestroika (but without glasnost) makes the different varieties of capitalism ever less distinct.

It is ten years since the post-Mao economic reforms began. Individual enterprises had greater power delegated to their managers, and then the system of contracted responsibility meant greater emphasis on the market to determine prices rather than central decision. Now, in the so-called "third wave" of reform, certain enterprises are being merged — that is, loss-making concerns are being taken over by more profitable ones. In ever more explicit acknowledgement that the profit system operates in China, individual factories are now viewed as commodities to be bought and sold. The way in which people are treated in a profit-oriented economy is highlighted by an admission that men are often preferred as employees to women, since the latter produce less surplus value (owing to longer breaks and maternity leave).

Houses in the Chinese countryside are usually owned (and indeed, built) by the occupiers, but those in towns and cities are nearly all state-owned. Rents are extremely low (around 3 per cent of a tenant's monthly income) as part of the social wage but there is a housing shortage and the building industry naturally makes no profits. Overcrowding is appalling, sometimes a family of grandparents, parents and child will have to live in a single room. Nearly half of urban households have access only to a shared lavatory, and over a quarter do not even have their own tap water. It remains to be seen how many will want to buy such palaces. The other problem will be fixing a price for the sold-off homes, as the present market price would be way beyond what ordinary workers could afford. It may even be decided to raise rents in order to encourage buying.

The Chinese health service is in no better shape, with the contradictions now patent between a system supposedly run for the benefit of all and one where profit and loss considerations are decisive. Hospital treatment is not free, but fees are very low, and well below the actual cost of treatment. However, the method of subsidy is such that the more patients a hospital treats, the more money it loses. So some hospitals now turn away patients, even in emergencies. According to one recent report from the south-west of China, doctors and nurses fought in the operating theatre over who should have the gallstones being removed from one patient — gallstones are a valuable ingredient in traditional Chinese medicines, and provide a convenient way for staff to augment their meagre incomes. Capitalism really does put a price on everything.

Just as in Russia, there is a flourishing black market in China: corruption and profiteering have become a way of life for some, and a part of everyday life for many more. Cigarette prices have been increased, with the unintended side-effect that private dealers take advantage of the fact that prices vary from place to place: they buy up popular brands and re-sell them at a profit in more expensive areas. Imported cigarettes are also subject to price speculation. High-quality liquor (costing over a month's wages per bottle at the new higher prices) is bought mainly by firms and various other organisations, presumably as perks for top employees or potential bribes. Such institutional "living it up" has been particularly frowned on, the government having ordered a reduction of spending and prohibited the use of top-class hotels for receptions and banquets.

In the first nine months of 1988, the retail price index rose 16 per cent. Economics spokesmen have complained that the economy is “overheating", with industrial output racing ahead of the production of energy and the capacity of the transport system. In a so-called planned economy, the number of state-run construction projects has had to be curtailed drastically. And a rise in imports has created a massive trade deficit.

Cancelling the construction projects does not just mean fewer luxury hotels, for those who would have been working on them (an estimated 13 million) will instead be returning to the countryside to put further stress on rural employment and living standards. The price at which the state purchases grain (wheat and rice) has stayed low, but has still been too high in many areas where local governments have put resources into construction projects. Consequently, some farmers have been paid not in money but in government lOUs. which do not provide clothes or heating. At the same time, grain imports have reached an all-time high. But 20 million peasants are officially reported to be short of food, after the fourth poor grain harvest in a row. A small minority of rural entrepreneurs have become extremely rich under the new regime, while others are forced to abandon their fields as fertiliser prices soar beyond their means. In other cases, the low grain price means farmers prefer more lucrative crops. But less grain also means less animal feed and so less pig-raising, hence the reintroduction of pork rationing in many cities.

As some workers return to their homes in the country, others head for the big cities in search of work. In Beijing there are nearly half a million so-called "vagrants" who have been there for over three months. Most sleep rough and exist on restaurant leftovers. Beggars are now a common sight in many Chinese cities; some disabled people are forced to beg because they cannot get a job or adequate welfare support. And the flood of overseas visitors has combined with the grinding poverty experienced by so many to cause the reappearance of prostitution.

In September, the free-market guru Miltom Friedman was warmly welcomed in Beijing. As he shook hands with party boss Zhao Ziyang, Friedman may have been reflecting that the two of them had plenty of common ground to discuss.

Paul Bennett

The Poverty Trap (1978)

TV Review from the May 1978 issue of the Socialist Standard

One thing that is not lacking under capitalism is public exposure and debate of the inescapable poverty that is the lot of the majority. This debate has been taken up by the television industry and the viewers are treated to no-holds-barred confrontations in which not only politicians take part but also those directly involved, landlord and tenant, employer and employee and so on. The general point of view is that things are grim now and the best that can be hoped for is that they do not get worse.

This point came over well in Are We Really Going To Be Rich? (April 4) the Yorkshire Television Production on ITV on the subject of North Sea Oil. Representatives of a mass of conflicting interests made up the studio audience and as if the talents of Jimmy Reid, Sir John Methven, Sir Keith Joseph, Lord Ballogh and all were not enough, no expense was spared to bring in the images of Tony Benn from London and participants from America including top of the pops economist Milton Friedman. Chairman David Frost saw to it that all (except Socialist) opinions were voiced. These ranged from the oil rig hand who wanted “full blooded socialism” (really milk and water state capitalism) to the capitalist who was well satisfied with his stake in North Sea Oil. Or Jimmy Reid who wanted the operators to be directed to buy British equipment, providing it was competitive and the American executive who complained of delays in the deliveries of it.

When it came to the question of what should be done with revenue the government were expecting to get from North Sea Oil, there was general agreement that it should be used to revive ‘British’ industry and reduce unemployment. The Tories wanted to do it by tax cuts and the Labourites by government ‘enterprise’. All seemed to agree that the most they expected was some form or other of capitalism with the wage labour and capital relation left intact. That is, all except Milton Friedman who showed what it takes to be a Nobel Prize winner. He proposed to make lump sum payments to turn us all into capitalists, as these assets belonged to the people, not the government. Apart from the fact that £5,000 as capital could not bring in enough income to enable even the stingiest person to live, capitalism needs workers to produce wealth. This modest handout would not change things, the majority would remain propertyless in the means of production; they are workers, not capitalists. Indeed it is the needs of capital to find a profit that dictated the form the debate took, with workers seeking work and capitalists (private and state) seeking profitable investments.

Any worker having the illusion that there are good times ahead, from an oil bonanza would have done well to learn the lessons of the BBC2 Horizon programme The New Breadline shown on Good Friday. There are, it was claimed, 7 million people living on or below the official poverty line, which has not changed substantially since that established by Seebohm Rowntree in 1899 based on a diet below that of the workhouse, and slightly amended in the 1930s. Also shown were the results — children sent to school without breakfast from Wednesday each week as the money has run out; children reduced to being dressed only in jumble sale clothing. Social isolation is another result, they cannot afford the fares to visit friends and relations; cannot afford their own drink, never mind the round that is mandatory among mates in a pub.

Among these 7 million are old age pensioners. People who, after a lifetime’s work, have insufficient income from pensions and savings to live above the official poverty line. Grinding poverty, with inadequate food, heating and so on is still the future most workers face in the evening of their lives. Then there are the unemployed, victims of the slump in world trade. For many it is their first taste of idleness after years of steady work. Many disabled people, and single parent families, are among the official poor. Even some workers with regular jobs earn wages below the poverty line. What is obvious is that the 7 million official poor belong to that section of society who have to work for wages in order to live; the working class. Most workers are but a couple of wage packets away from the situation of the official poor.

Poverty is therefore not restricted to those who are officially classified as such, it is the condition that workers in general are familiar with. Not mentioned in the programme were the people who not only never need go near a social security office, but never need worry about getting a job. The rich are not irrelevant to the question of poverty. The existence of one is the condition of the existence of the other. The wealth going to the rich of this world comes from the work of the poor. The rich own the means of production, the poor do not. The poor produce more than is required to maintain them as workers and this surplus keeps the rich. Be they old, lame, part of a single parent family, the rich need no supplementary benefits, least of all need they seek employment. The answer to David Frost’s question “Are we really going to be rich?’’ is obvious. There will be rich and poor as long as capitalism lasts.

Joe Carter