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The Global Financial Crisis: Minsky Moment or Marx Moment? Or Maybe a Marxsky Moment?

The noted American marxist journal, The Monthly Review has a most fascinating debate on the global financial crisis between Thomas Palley, a structural keynesian, and John Bellamy Foster and Robert McChesney, both orthodox marxists. The debate featured in the April 2010 edition of this important publication.

Now I have always argued that the crisis has had class war right at its core; that is, it is not possible to understand the economic crisis without taking into account the fact that wages for non-supervisory workers have been largely stagnant, in the United States (the state of “really existing neoliberalism”), throughout the neoliberal era.

But I have also been fond of Misky’s financial instability hypothesis. I have felt that these two aspects need to be combined in some fashion.

Palley does this in a most forceful way. He argues,

The new Marxist, SSA, and structural Keynesian views trace the roots of the crisis back to the adoption of the neoliberal growth model in the late 1970s and early 1980s when the post-Second World War “Treaty of Detroit” growth model was abandoned. The essence of the argument is that the post-1980 neoliberal growth model relied on rising debt and asset price inflation to fill the hole in aggregate demand created by wage stagnation and widened income inequality. Minsky’s financial instability hypothesis explains how financial markets filled this hole and filled it for far longer than might reasonably have been expected

Palley goes on to develop a model that does this in greater detail. His work is impressive, well argued and persuasive. He does speak of Minsky “super cycles”, which Foster and McChesney chide him for on grounds that such cycles do not appear in Minsky’s work. Foster and McChesney here make good points, but the real issue is whether such cycles obtain or not. That is an empirical question requiring detailed study.

To borrow from Isaac Newton, I frame no hypothesis.

The real difference between the two revolves around whether capitalism can be reformed so that such crises do not repeat themselves. For Foster and McChesney the crisis is a reflection of a long standing and deep seated crisis of stagnation, what Paul Krugman would perhaps have called “the age of diminished expectations”, brought about by a persistent crisis of accumulation. This is intrinsic to capitalism and cannot be eliminated.

So they write,

the underlying problem of accumulation in the advanced economies today is one of a deep-seated stagnation tendency arising from a high degree of monopoly (oligopoly) and industrial maturity. More actual and potential economic surplus is generated than can be easily or profitably absorbed by consumption and investment, pulling the economy down into a slow growth state. As a result, accumulation becomes increasingly dependent on special stimulative factors

With such stimulative factors taking the form of overt financialisation, speculative bubbles in asset prices and the like. You could still add in Minsky’s approach here, I think.

Palley is surely right to identify the real issue at play

If there is a difference, it may well be a difference of degree of optimism. Structural Keynesians believe it possible to design appropriate institutions that, combined with traditional Keynesian demand management, can escape capitalism’s stagnationist tendencies and deliver full employment and shared prosperity. New Marxists and SSA theorists are more pessimistic about the capitalist process, the ability to escape stagnation, and the social possibilities of markets. Consequently, their institutional design would have a larger public sector and more nationalization, especially regarding the financial sector

I think Foster and McChesney would agree that this is essentially the debate’s bottom line, so to speak. I certainly myself form that impression.

The problem with Palley’s approach is that he does not really provide us with any real discussion as to why the neoliberal growth model was adopted.

I do not believe, furthermore, that the model is a “growth” model at all.

During the hey day of keynesian demand management, that is what is sometimes called the “golden era of capitalism”, there was a much more equal spread between wages and profits. The whole edifice was broadly social democratic and the trend rate of economic growth was higher than the trend rate throughout the neoliberal era.

The neoliberal “growth” model actually tolerates economic growth that was less than trend, by about 50% less,than that exhibited during the hey day of the keynesian growth model. Growth was not really the object of policy. What was?

To see what was we need to consider the origins of the neoliberal growth model. The reason was declining corporate profits. The purpose of neoliberalism was to increase profits, hence the wages squeeze to which Palley refers. In reality what we had was a neoliberal profit model. Economic growth was below trend, as discussed above, but the take of profits in the wages-profit share leaped to record levels. In fact the record kept getting broken like the record in women’s pole vaulting. That’s why you had stagnating wages, for how can you manage to achieve record profit shares when growth is well below trend? Simple; you take and take some more. For the consumer to maintain the American dream required taking on very high private debt, which brings in my pal Minsky.

I don’t agree with how Foster and McChesney frame their argument, but nonetheless we must recognise that profits, not growth per se, is at the core of capitalism. In this sense a growth model that is great for GDP growth, but which has the tendency to restrict profits, is not functional in the long run under a capitalist system dominated by large corporations whose raison d’etre is to maximise profits.

It’s a type of institutional contradiction. So I think that Palley’s argument is not deep seated enough. I agree with Foster and McChesney on that.

Having said that I also like to add one more point that I think Foster and McChesney do not appreciate.

Say Palley is right about the prospects that a reformed capitalism, the type he outlines, can prevent future crises and lead to sustainable economic growth. That Palley’s approach would do this with greater equity and fairness seems to be an unspoken corollary of the argument. That means corporations would need to acquiesce in the curtailing of super profits.

What implication would this have for the case for socialism?

Precisely zero.

The argument for socialism rests on moral grounds. Marxists, especially marxian economists, like to focus on pragmatic considerations such as accumulation crises, stagnation crises and the like.

The case for socialism is developed through an application of pre-industrial classical liberal ideas, that arose out of the enlightenment and the rise of a spirit of rationalism therein, to a modern industrial capitalist society. Any economic system that has vast concentrations of private power is unjust for precisely the same reasons that the classical liberals used to critique the state during their era.

The case for socialism flows on from such considerations. Marxian economics is quite irrelevant.

What is at issue between Palley and Foster and McChesney is not so much socialism versus capitalism as it is the scientific credentials of marxian economics.

On the latter I pretty much agree with the Australian post keynesian economist, Steve Keen, who has developed a pretty convincing argument rebutting the scientific basis of marxian economics.

This fits in to my broader view that no theory of economics deserves the title “theory” or the honorific “scientific”.

But the fact that marxian economics has no legs does not in the least bit upset my socialist convictions.

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