Commentary on Political Economy

Monday 24 October 2011

Keynes and the General Theory – Theoretical Origins of the Crisis-State

Really and truly I do not know how to thank the many friends who continue to visit this humble site. At the risk of having the 'Krisis' book pillaged (only joking!) and seeing how popular the discussions of Keynes and Schumpeter have proved (but believe me, friends - Nietzsche may be a lot more difficult, yet he is far more significant in terms of reaching a critique of the bourgeois Rationalisierung), I am offering here my notes on 'Keynes and the Neo-Classics', between the October Revolution and the New Deal. Fascinating stuff, I hope you agree.

Incidentally, we are now close to the 15,000th visit in only four months! Small wonder we have shot up to the top of most Google Searches on "Economics"! Ciao a tutti.

The most important distinguishing mark of neoclassical economic theory is its pure “subjectivism”. Under the pretext of championing “individualism” and contrasting “collectivism”, the Neoclassical Revolution is an intransigent and powerful reaction to the rising tide of working-class movements in Europe that contrast the rule of the bourgeoisie under the banner of Socialism. The life-and-death problem for European bourgeoisies still tied to feudal and dynastic aristocratic traditions of government is how “to include” the mass of industrial proletarian workers that the First Industrial Revolution has spawned and concentrated “dangerously”  in urban industrial centres in which the interdependence of “social labour” requires a level and intensity of political co-ordination that the old laissez-faire attitude theorized by Adam Smith and the Anglo-Saxon liberalists simply cannot supply. The threat of socialist revolution is present and growing by the hour. Imponent mass parties representing the rights of “labour” are surging in every nation and demanding “representation”, even the opportunity to govern in their own right (!) in the old “parliaments” that were previously the preserve of the nobles and notables.

The French and American Revolutions have made a return to the old aristocratic order envisaged by the Congress of Vienna absolutely untenable. When Napoleon declared to the ageing Goethe that “Nowadays, fate is Politics”, what he meant was that the only way to prevent revolutions and to preserve bourgeois public order is to integrate these vast “labouring and dangerous classes” under the political banner of nationalism. The old European state armies cobbled together and then disbanded at the whim of local “princes” will count for nothing and be ignominiously and definitively defeated and smashed by the new Napoleonic Grand Armee fighting with fervor and fierce conviction for the ideals of “Liberte’, Egalite’, Fraternite’”.

The Neoclassical Revolution stubbornly and cynically refuses to accept this new reality of the Political. Not the Political of the old Classical Political Economy and of Liberalism in which the “equilibrium” of the “self-regulating market” ensures simultaneously the ever-growing rational “growth” of “the wealth of nations”, of their “common-wealths”, and at the same time preserve a “public sphere” in which individuals may express their “free political and religious and moral opinions” so long as these do not interfere with the “operation of the free market” now elevated to a “science” governed by the “economic laws” mathematically formalized with increasing accuracy and rigor by the neoclassical school from Gossen through to Menger and Jevons, and then to the opposing extremes of mathematical formalism with Walras and of institutional practice with Marshall.

Just as the real subsumption of the production process by the bourgeoisie requires the accumulation of value the better to be able to combat the antagonism of workers to the wage relation, so this growing “intensification” of the labour process to maximize profit entails the “rationalization” of every aspect of social life – at first only those aspects connected with the process of production inside the workplace, but later also those aspects of social conduct that have to do with consumption and distribution and also with the supply of resources horizontally and vertically for production. This process of “rationalization” proceeds with the “quantification” and “measurement” of every aspect of individual and social life. Because the satisfaction of the growing needs of the workforce is seen as the increase of “wealth” due to rationalization, both Classical Political Economy and the Neoclassics see the discovery of mathematical relationships between production and distribution of the product as vital to determining the most efficient methods of production consistent with the most equitable distribution of the product. The question for economics is to define “wealth”, to describe its efficient distribution in proportion to the contribution of the various factors of production.

In the best of his “Essays In Biography”, Keynes describes with a brilliant simile the peculiarity of Marshall’s approach to the mathematical methods to be applied to economics:

Jevons saw the kettle boil and cried out with the delighted voice of a child; Marshall too had seen the kettle boil and sat down silently to build an engine. (pp.155-6)

For Marshall, Jevons has merely suggested a formal mathematical framework of interpretation of a given social reality – a “concrete truth”. But this “framework” must in no guise be mistaken for a “universal truth”: it is merely an “economic dogma” because, as Marshall well knew, “utility” itself is a purely “subjective” notion and, as such, far form leading to “concrete truths”, it may well represent the height of irrationalism, it may amount to nothing more than sheer “metaphysical dogma”. All one can do is to construct “an engine”, a “tool” or instrument for the discovery of those “regularities” of social behaviour that can guide enlightened public policy.

While attributing high and transcendent universality to the central scheme of economic reasoning, I do not assign any universality to economic dogmas. It is not a body of concrete truth, but an engine for the discovery of concrete truth. (p171)

(Keynes himself in the General Theory will not renounce the reactionary irrationalism of marginal utility theory: instead, he will compound it with his own brand of mysticism dragged to the cynical depths of “animal spirits” and “uncertainty” – and indeed of “black magic” as in his strangely sympathetic portrait of Newton’s arcane experimental practices in these ‘Essays’.)

The essential point to grasp here is that both theories of economics – the neoclassical and the socialist - take “the factors of production” as given: they differ only in how the actual “output” ought to be distributed (socialism) and about the effects of “political intervention” on the operation of the market (neoclassic). In both cases “the economy” is seen as a “given” set of technologies and a “given” set of “inputs” that can only result in a “given amount of output”. In this way, the early reflection on “economic science” is “locked out of the factory”, as it were; it does not scrutinize the process of production; like Marshall, the economic “socialists” (who form in fact the vast majority of “economists”) are concerned not so much with the inequality of income but rather with the inequality of opportunities. In other words, it is the “interference” with the proper operation of “the economy” – the production of goods and services and its “fair” sale on the market – that concerns economists: there is no notion on either the socialist or the “liberal” side that “the economy” itself, the process of production, involves an “impossible exchange”!

The economy therefore is seen as a “mechanism” that functions “objectively” in terms of “inputs” and “outputs” whose “quantity” can be determined “mathematically”. The economy can function “automatically” like a machine; it cab be operated “scientifically”, as in a laboratory experiment, for the greatest good of the greatest possible number. The “utility” of the individual matches therefore the implicit utilitarianism and egalitarianism of the Sozialismus: it is under this deception that the workers’ movement will labour from its inception to the present day. Yet it is quite evident that “the economy” does not operate automatically because it is subject to violent fluctuations and investment cycles that shake society from booms of full employment and prosperity to busts of high unemployment and depression. It is equally obvious that these “deviations” from what ought to be an “objective mechanism” manageable “scientifically” must be caused by some “interference” that relates not to the process of production itself but rather to the “distribution” of the “industrial output”.

The “hiatus”, the “gap”, lies between the moment goods are produced and the moment they are purchased: the process of production itself is not even remotely put in question either by the promoters of Socialism or by their “bourgeois” counterparts. The fact that the means of technology utilized in production and the “goods” produced for consumption (and therefore also the “materials” used for their production) may be the result of political antagonism, that they may “embody” the antagonism of the wage relation, does not in the least surface among the considerations of “economic analysis” either Classical or Neo-classical. But this “hiatus” that leads to the frequent “observable crises”, to the cycle of boom and bust of capitalist industry, and so of output and employment – this “hiatus” has to do either with the excess of consumption on the part of workers whose wages are excessive or else it is caused by the excess of investment on the part of capitalists whose unusual “profits” lead straight to “overproduction” or “underconsumption” on the part of workers whose money wages are insufficient to consume the product. In either case it is the presence of “money” that clearly causes the distortions, the “discrepancies” between production and consumption that cause “the economy” to sway from excessive production to excessive consumption, with corresponding falls in profitability, investment and employment.

In this framework of analysis of capitalist production and society, whether it is the Socialists who condemn capitalism for its “anarchical”, “unplanned” excesses that cause misery for the unemployed, or whether it is the laissez-faire liberals who blame “political interference” and the misguided attempts by “Socialist” governments to interfere with the free market operation – in both cases all “economists” can agree that it is the presence of “money” as the “veil”, the “intermediary” between production and consumption, that is – as it always was from the dawn of Christianity – “the root of all evil”.

Two central features emerge then from the peculiar Weltanschauung that both Socialism and Liberalism come to share at the end of the nineteenth century and at the beginning of the last one: the first is that “the economy” is a sphere of social activity that can function “automatically” and that is governed by “objective economic laws” provided that these are allowed to operate freely; the second is that the objective operation of the economy must be managed and planned scientifically by the State, for the Socialists, or, for the Liberals, it must be allowed to work through the self-regulation of the market without interference from the State. The role of the State “to regulate” the economy is achieved therefore through the monetary medium, either through the control of the monetary mass and the interest rate, or else through social policy that redistributes income between the social classes, or else still through direct intervention by the State in the economy through policies aimed at “buffering” the extreme swings of the market economy.

Neither in the Socialist vision of Economics, nor in the Liberal one is there any room for the State as a rightful “factor” in economic analysis: for both political positions, the State remains “external” to the operation of what is seen as a “market economy” whose only “disturbances” or “crises” are derived not internally from production but externally through distribution – distribution that boils down ultimately to “monetary” factors, whether in terms of monetary magnitudes or of monetary redistribution of income through fiscal intervention by the State. The idea of the State as an essential and necessary component of the economy was as foreign to laissez-faire liberalism as it was to the most revolutionary members of the Linkskommunismus. True it is that the Leninist faction of the Second International advocates a “dictatorship of the proletariat”. But this “dictatorship” is the equivalent of changing the drivers of the same vehicle: the idea that subtends all Socialist dogma from Proudhon to Social Democracy and Bolshevism is that the proletariat will take over the capitalist machinery of production to run it in its own interests. There is no suggestion that the social relations of production and, with them, both the means of production and the products and the methods of consumption and distribution will change as well! Even Lenin’s extensive pronouncements on the strategy and tactics of the revolutionary party will limit themselves precisely to these “strategies” in favour of the “skilled workers” who are being “supplanted by machines” and whose “artisanal skills” are lost to the universal alienation of Taylorism (lampooned by Charlie Chaplin in ‘Modern Times’) and loss of “totality” in the labour process that only the proletariat as “the individual subject-object of history” can restore! (Lukacs) It was Lenin after all, and now the fact should not seem so surprising, that “Politics is a concentrate of Economics”.

Lenin has no doubts that his Bolshevik Revolution represents a leap too far – such is the “backwardness” of Russian capitalism that its “economy” will have to be “upgraded” to the level of technical and managerial leadership of German industry (see his ‘The Development of Capitalism in Russia’). But the October Revolution of 1917 will offer Keynes as early as the Versailles Treaty conference (cf. his explicit reference to Lenin in ‘Economic Consequences of the Peace’) with the “challenge” that Leninism represents for Western capitalism: here is the first and most troubling epoch-making historical and social evidence of the fact that “the economy” cannot be separated from “society” and that the Political in the final instance can destroy what had seemed until then to be “the economic laws” of any social organization. (Absurd must have seemed to Keynes the farcical attempts of Von Mises and Hayek “to prove the impossibility of a socialist economy” (!) in response to Bolshevism, written as early as the late 1920s –cf. Mises’s book, Socialism and introduction by Hayek.)

We will look in more detail at the effect of the New Deal on Keynes’s General Theory in our next piece. For now, let us end this discussion with the interesting parallel of the effect that the Bolshevik Revolution had on the two highest exponents of bourgeois economics in the 1930s – an effect that was only to be reinforced by the advent of the Rooseveltian New Deal as a portentous capitalist response to the Leninist challenge. Both Keynes and Schumpeter, in fact, who up until that time had confined themselves to critiques of neoclassical theory that were more in the nature of “cosmetic” improvements or corrections and who had shared unquestioningly the schema that we have presented here of a capitalist economic “mechanism” independent of politics and the State, following these two epochal “revolutions” in the institutional asset of the nation-state – one Leninist and the other Rooseveltian – transformed their own theoretical approaches to include precisely the possibility – and indeed the inevitability – of a fundamental role of the State, of the Political, in the essential operation and functioning of any Economy. After the Red October and after the Hundred Days, it seems, the old bourgeois illusion of the epistemological separation of Economics and Politics – of their “homologation” in separate spheres of social reality – becomes absolutely impossible. “Lenin is quoted as saying,” relates Keynes in the ‘Economic Consequences of the Peace’ (but the statement has never been corroborated, “that the best way to undermine a country is to debase its currency.”

References: (Keynes) (This is an almost literatim - but strangely unacknowledged - translation of a brilliant piece on Keynes by Antonio Negri first published in Operai e Stato. The translation and some unauthorised intrusions make the reading sound more "triumphalist" than was even the original. But it is a useful review that some of you may wish to peruse.)

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