Why Keynesianism wont deliver the goods

As noted in a previous issue of Socialist Voice (“Explaining the crisis,” June 2012), falling profitability in capitalism is seen by many Marxists as a proximate cause of the recession. By that logic, the long recession will end only if the capitalist economy’s profitability returns to sustained growth.

     Given the calls by the ICTU, SIPTU and others for a “growth strategy,” based on state stimulus, we need to consider whether such policies can re-establish a depressed economy’s profitability. Would a Keynesian strategy encourage economic growth?

     By Keynesian strategy is meant state-led, capital-financed policies, of either a distributive or investment nature, based in the civilian sector. Under a redistributive policy the state shifts the distribution of national income from capital to labour through progressive taxation. This causes wages to rise; higher wages tends to mean that more consumption goods are sold. Under a Keynesian strategy, the sale of unsold consumption goods kick-starts the production of consumption goods, and this in turn generates a demand for means of production. An upward cycle begins.

     It is not altogether clear, however, that more consumption on the part of labour entails increased production of consumption goods. Suppose that in the recessionary, pre-redistributive stage some consumption goods are unsold. In this case higher wages derived from a redistributive policy boost the sale of unsold consumption goods but not necessarily a greater production of such goods. A Keynesian strategy of redistribution, therefore, fails on its own terms, in production and in the expected spin-off of employment growth and recovery.

     In any case, capitalism grows not when production increases but when profitability increases. If a capitalist cannot sell their output, they suffer a loss. If later, because of higher wages, that output is sold, they realise that profit. But profitability can still fall.

     For example, imagine a capitalist producing consumption goods. The capitalist advances €60 for means of production and €40 for labour and makes a profit of €40. The rate of profit in this case is 40 per cent. Now imagine that a higher wage is paid, so that €44 is advanced for labour. Profit remains at €40, but the rate of profit falls to 38½ per cent.

     Alternatively, imagine that higher wages in one sector producing means of production allow for increased consumption on the part of workers in that sector. This might mean higher profit for the sector producing consumption goods. However, the loss in the means-of-production sector and the profit in the consumption sector cancel each other out.

     Therefore, a Keynesian redistributive strategy fails on the grounds of profitability. If profits fall, capitalists decrease output, notwithstanding higher demand, because less surplus value is generated and, because of higher wages, the weaker capitalists go to the wall, ceasing production, shedding labour, and so on.

     State-induced civilian investments represent another aspect of Keynesian strategy. Typically, Keynesian approaches favour capital-financed state-induced investment policies. Imagine then a sector producing public works and another sector, the private capitalist sector.

     Surplus value is taken, through taxes, by the state from the private capitalist sector and sent to the sector producing public works. For the capitalist sector this is undoubtedly a loss (a deduction from surplus value); the private capitalist sector loses to the state sector.

     Of course under conditions of the multiplier effect the sector producing public works purchases labour power and means of production from other firms in the private capitalist sector. In their turn these firms purchase means of production and labour power. This effect multiplies throughout the economy. The state-induced investments are sufficiently large to firstly absorb the unsold goods and then stimulate new production.

     However, a problem with this is that the extra investments tend to go to the most efficient firms in the private capitalist sector. This tends to push the less efficient firms out of the market, so aggravating the crisis.

     Keynesian induced investments can also rely on debt-financing. Again this is not unproblematic. If a debt-ridden state sector adds on further debt to the balance sheet there is a risk that government debt will eat into the capitalist sector’s profitability through higher taxes on business, smaller subsidies to business, higher inflation of costs and higher interest rates for borrowing across the board. A debt-financed Keynesian strategy can only be a substitute for failing private investment and consumption in the short run. In the long run it is a burden on capitalism.

     This is why the capitalist class seek to have it reduced. Of course if both businesses and households are deleveraging and this is followed by government deleveraging, that threatens a prolonged slump.

     But the alternative of continued government borrowing is lower profitability and a weakening of the capitalist system of production in general. Those who favour austerity are likely to favour another recession so as to cleanse the system through the destruction of capital values.

     Keynesian strategies can alleviate the pain for labour, and government investment can help create new jobs in the short run. But, contrary to what one SIPTU economist seems to think, it will not boost profitability but rather will undermine it.

     Given that capitalism is the dominant form of social production, government spending will delay the recovery, not speed it up. If we want to end the recession we need to end the capitalist mode of production and replace it with democratically controlled, planned social production.
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