Commentary on Political Economy

Saturday 25 February 2017

Theories of Overproduction and Underconsumption

Theories of Overproduction and Underconsumption

The response of capitalist governments to the growing proportion of public debt and of the share of government spending in the economy (now nearing 100%) was a deliberate and radical attempt to turn the tide of the apparent “socialisation” of capitalist production in the 1980s and 1990s through an aggressive program of “privatisation” of state industries and services as well as the “liberalisation” (a relaxation of government-political controls and regulation) of several areas of capitalist production – and in especial mode of the financial “industry” (banking and other financial services). This was exemplified dramatically in the US with the repeal of the Glass-Steagall Act, a mainstay of Roosevelt’s New Deal reforms. All these measures (or “reforms”) were designed and intended to reverse the tide of “socialisation” of the capitalist economy in the wake of the inflationary crisis of the 1970s. But in reality the apparent “success” of this strategy was due in large part to the epochal reversal of politico-economic policy operated by the Chinese dictatorship in the early 1980s which resulted in what has been called “the Great Moderation” in Western capitalist countries characterised by steady inflation-free growth nearly everywhere.

We have often visited these matters on this site and we do not wish to revisit them here. But, as we know, the net result of the Great Moderation was not “the end of history”: rather, the underlying social antagonism brewing in Western capitalist economies was swept under the carpet through the lowering of the nominal cost of real wages due to cheap imports from China predominantly, which meant that the profits generated by the absolute exploitation of hundreds of millions of Chinese workers could then be recycled in the West through the extension of increasingly unsustainable “loans” for house-building and consumption. Instead of wage inflation, the capitalist West was fuelling enormous debt bubbles with asset-price inflation that were certain to explode in due course and send the whole system into the greatest crisis since the 1930s. And this is what we are witnessing now.

What Bernanke is asking in his speech is for the “emerging market economies” to expand domestic consumption by appreciating their currencies and diverting their export-oriented industries toward wage goods so that Western capitalist countries may be able to compensate for and resolve its present seemingly insurmountable antagonism through exports to those countries. The chief difficulty with this proposition, as may be already evident, is that any expansion of employment in Western countries will result in much higher social antagonism – which is why Bernanke is also suggesting that the West must imitate and replicate “the fiscal rectitude” of the emerging countries so as to contain what he expects will be social explosions in the West.

In our next intervention we will examine how and why the present asset of capitalist institutions is unable to contain the antagonistic push of workers’ social needs without a repressive turn to right-wing policies aimed at smashing the social network of solidarity that was established as a result of the New Deal in the US and its extension to Western Europe and Japan after World War Two. In the process, we will take a rapid look at the cavernous idiocy of even the best-intentioned bourgeois economic theoreticians and analysts from Minsky to Krugman (and Kalecki and Keynes earlier) in terms of their infantile theories of overproduction and underconsumption as explanations for the current epochal crisis of capitalism.

Theories of Overproduction and Underconsumption - Bernanke Comments Continued

Perhaps the most important "lesson and implication" to be drawn from Bernanke's revealing speech that we have been dissecting here (with good reason, given the powerful insights it contains from one of the most perceptive and decent proponents of world capitalism) is that the "growth" of so-called "emerging market economies" over the last twenty years has been the result of the sheer h
orizontalexpansion of capitalist investment originating in the Western "advanced" capitalist countries at the expense of the growing populations of those "emerging" countries that have quite simply (disarmingly) only adopted Western technologies straight from the "tool-box" of Western capitalism so as to be better able to exploit their own "resources" (population, society, land, environment) to drive down real wage costs in the West. And this, what we know as "the Great Moderation", worked until recently when finally the "profits" that originated in the "emerging" capitalist countries could no longer be re-ploughed "profitably" in the West or in the periphery - with the resulting financial crisis that we know.

Bernanke seems to think that a simple "re-alignment" of currencies and capital flows - and therefore of the "burden of adjustment" - between capitalist countries the world over (core and periphery) may be sufficient to re-start, to re-invigorate the capitalist regime of exploitation toward its "relative" mode: - that is to say, a mode of capitalist exploitation that trades off better living standards for workers in return for higher productivity and profits. The reason behind this proposal is that Western capitalist investments have hit a barrier of profitability in that profitability has been declining steadily since the spread of what we have called “the New Deal Settlement” through the Marshall Plan in Europe and Japan after World War Two.

This conspicuous and utterly undeniable decline is too well-documented and widely accepted even by the most orthodox economists (recall, apart from Keynes’s perception of the problem, John Hicks’s decadentist notion of the “Labour Standard”, Hyman Minsky’s “instability hypothesis”, Joseph Schumpeter’s prophecy of the inevitable decline of capitalist elites – and so on) to deserve much discussion in this note. The dramatic rise of State deficits in the US, Japan and Western Europe has reflected precisely this inability of capitalist industry to remain “profitable” without the added “politically-generated” demand coming from government institutions that needed to secure the profitability of “private” capital whilst maintaining social and political stability through infrastructure and transfer investments that secured the reproduction of the society of capital.

What State budget deficits entailed and still engender is the inability of private capitalists to command social labour directly, so that the “legitimacy” of capitalist social relations can be maintained only through the “government-political” absorption of social consumption (or “aggregate demand”) by the State because this, once again, was the only way in which “private enterprise” could be maintained as a pure “mythology” just as the capitalist social relations of production (the wage relation) became utterly and absolutely incompatible with the “private” claims of capitalists on the social wealth that is being produced!

Put in simpler terms, the decline of the “profitability” of private capital investments – of private command by dead labour over living labour – had to be replaced by an ever-expanding politically-controlled role in the capitalist economy by the State in order to ensure the continued “validity” of capitalist social relations of production, of the wage relation, in the society of capital. The obvious result was the burgeoning growth of budget deficits and public debt that we saw in the 1970s and 1980s.

The Social Contract - Theories of Overproduction and Underconsumption Continued


Theories of over-production and under-consumption have this in common: - that both postulate the existence of a “neutral process of production” over which the only antagonism possible is over the “distribution” of the “product” understood as homogeneous “output” either (in the Marxist version) of “socially necessary labour time” or (in the neoclassical version) of the marginal utility of the totality of “endowments” available for exchange on the “free self-regulating market” through the “price mechanism”. We have already considered the “apories” (or practical contra-dictions) involved in these notions and will not reiterate them here.

The important point to understand is that “over-production” and “under-consumption” theories both postulate an “equilibrium level” of profits and wages that (in the neoclassical version) is determined by the original marginal utility of the “endowments” of individual market participants and (in the “Marxist” version – which is partly a distortion of Marx’s position) by the politically-determined “share” of wages and profits over the distribution of the “output”.

One thing to notice immediately here is that this theory does not explain why, given that “output” is a homogeneous set of “pro-ducts” produced with “neutral and exogenously given” technologies, there should be a “class division” between workers and capitalists. Put otherwise, if all that is wrong with capitalism is that capitalists may re-invest too much (overproduction) or that workers may consume too little (underconsumption) –why, then the answer is all too easy! Simply ensure that capitalists and workers work out (mathematically!) the “equilibrium” level of wages to profits so that the economy may operate at maximum efficiency with full employment of resources! The whole of economics would then boil down to a simple “engineering problem”! Because obviously it could never be the case that workers would consume too little unless their wages were too low, or that capitalists would produce too much unless their profits were too high! In other words, in such an economy there would be no distinction, aside from a “technical” one perhaps (the capitalists would be simple engineers or managers “conducting” the production process), between workers and capitalists! Everyone could then aspire to become – as in the company capitalism utopia – a “shareholder” with a share in the economy commensurate with some “labour input” or politically-agreed level of income!

This is precisely the kind of nonsense that comes out of people like Kalecki and Keynes or Minsky and Krugman! All of these “theoreticians” deny that capitalist problems and crises have to do with the antagonism of the wage relation because…. that would amount to placing the blame on workers! (See Krugman link below. Minsky says as much in “Can ‘It’ Happen Again?”) As if, that is, workers should be blamed for an antagonistic relationship in which they are necessarily the “exploited” party that is forced and coerced “to sell” its “living activity” or living labour… in exchange for dead labour in the form of “goods and services” from the capitalist!

From Kalecki to Minsky and Krugman - Theories of Overproduction and Underconsumption 

In this brief intervention I wish to discuss cursorily, without source or data references, the most popular and frequent type of theories advanced by orthodox and even radical economists about capitalist economic crises. These tend to be cognate or contiguous in the sense that the one, the overproduction theory, is really the obverse of the other, the underconsumptionist. Typically, these theories regard capitalist production as a simple production of “goods”: in other words, the capitalist economy is simply a historical variant of many other preceding forms of production in that it differs merely in the way in which the social product is “distributed”. The underlying assumption is that expounded in the 1930s (before Keynes) by Michal Kalecki: capitalism is a system of production divided into capitalists and workers. The workers spend what they earn and the capitalists earn what they spend. In other words, the difference between the “classes” of capitalists, on one side, and workers on the other has nothing to do with social antagonism – with the political control over what is produced, when and how and to whom it is distributed – but rather it has to do entirely with the “distribution” of what is taken to be a “technologically-determined” process of production where technology and labour processes are entirely “external” to the capitalist system of production!

Now, we know very well that this is quite simply false. But for these so-called “radical” economists (from Kalecki to Minsky to Krugman even) what matters is not “what is produced and how”, but rather how the “product” (understood, once again, to be a “technically-given” output of production) is distributed between the social classes. It stands to reason, therefore, that for these theoreticians the entire problem of capitalist economies – all the crises, recessions and depressions – have nothing to do with the antagonism of the wage relation – with the command of dead labour over living labour – but have all to do with how the product of labour and technology is distributed.

If capitalists “earn” too much because wages fall too low, they will be unwilling to consume the surplus earned and therefore aggregate demand will be too low to employ all workers, resulting in higher unemployment. This is called “underconsumption”. But at the same time it is also “overproduction” because workers’ wages are insufficient to consume the whole “product”.  In the alternative case, if capitalists reinvest their “excess earnings” there will be “overproduction” as a result of excessive “competition” between capitalists which workers will not be able to consume because their wages will be too low to absorb the (excess) production at a given “required”  rate of profit. The resulting lower rate of profit will further remove capitalist incentives to invest unless a political entity like the State intervenes to provide the requisite aggregate demand, with a return to “equilibrium” between investment and savings and employment.

Alternatively, if workers are paid “too much” in wages due to excessive demand for “labour” or because of State labour policies, the resulting fall in the rate of profit will again cause a decline in the rate of investment with a consequent rise in unemployment. If the capitalists “save” or retain their excess profits, there will be “underconsumption” or deficient aggregate demand which will again result in a crisis that will require State intervention to restore “equilibrium” conditions.
In both these situations, it is the politically-determined or “acceptable” rate of profit and wage rates that will determine whether the capitalist economy is at equilibrium or not, and therefore whether or not there is a “crisis”. It can be seen quite readily from this very simple presentation that these widely-held opinions or “theories” of what constitutes a capitalist economy leave out the most crucial and essential element of capitalism: the social antagonism of the wage relation, of the fact that workers are not “free” to decide democratically what is produced and when and how, and then in turn what is to be done with the “pro-duct”!

We can see that in both instances the “radical” theories of capitalism presented here can oppose only a “moralistic” objection to capitalist production in terms of the “distribution” of what is uncritically and unquestioningly accepted to be “the process of production” – as if this were a “technically-given”, “scientific” process wholly devoid of political antagonism! That is why bourgeois economists are able to present “economics” as a “science” that deals merely with “quantities” or with “optimal distribution” of the “output” of production given basic “political” assumptions, choices and constraints that are “external” to economic “science” itself! Once again, we know that this is entirely false and grievously and perfidiously misrepresents and mystifies the operation of this most odious social system – the society of capital.

Monday, 3 October 2011

Saturday 11 February 2017

Is Economics a Science?


How can a Wittgensteinian language-game be fitted to human reality? Conversely put, how can human reality be made to fit into a Procrustean language-game such as "economic science"? The idealist "separation" (Plato's chorismos denounced by Nicholas of Cusa) of Subject and Object - starting from Berkeley through to Mach and then the Wittgenstein of the Tractatus - is the fateful precursor of Neoclassical Economics. The genealogy of this forma mentis is illustrated in and exemplified by Lionel Robbins's epistemological mise en scene of economics as "the science of choice". Yet far from being scientific, the Robbinsian definition of the economic problem rapidly degenerates into logical formalism, into yet another language-game far removed from the reality of human pro-duction. Any economics worthy of the name must become a "critique of political economy", that is to say, it must acknowledge its political essence, and then seek to overcome the real antagonism of its object of study - the capitalist economy and the society of capital. Cheers.

Even the wildest dream is a fact as much as

any other. If our dreams were more regular, more connected,

more stable, they would also have more practical

importance for us. In our waking hours the relations of

the elements to one another are immensely amplified in

comparison with what they were in our dreams. (p.11)

The ego is not

sharply marked off, its limits are very indefinite and

arbitrarily displaceable. Only by failing to observe this

fact, and by unconsciously narrowing those limits, while

at the same time we enlarge them, arise, in the conflict

of points of view, the metaphysical difficulties met with

in this connexion. (p.13) (Mach, “Antimetaphysik” in The Analysis of Sensations)

Mach’s theory of sensations is pure Schopenhauer. It contains therefore an implicit and stinging critique of Kantian metaphysics. To be sure, already the Kantian “thing in itself” had removed the relation between Subject and Object to one of mere “transcendence”, to the realm of “idealism” – however “critical” Kant intended these to be. And yet Kant’s notion of “intuition”, although it made human objective reality “unknowable”, still retained that indissoluble material link between human thought and “its” object – between fact and concept, between Object and Subject. The Kantian universe is still Galileo-Newtonian in the sense that it is something that can be com-prehended and en-compassed by human beings through the faculty of Reason by means of which the universe acquires an “order” and a “reason” that can be “uni-versally” recognized by all human beings – that can lead to a convergence or con-sensus over ultimate human goals and values. It is not that dreams are neglected because they have less “practical importance to us as scientists!” than waking reality: rather, it is because they have less importance “for the business of scientists!” The con-nection – empirical! – between the rise of capitalism and that of science is undeniable.

For us, therefore, the world does not consist of

mysterious entities, which by their interaction with

another, equally mysterious entity, the ego, produce

sensations, which alone are accessible. For us, colors,

sounds, spaces, times, . . are provisionally the ultimate


Elements [sensations], whose given connexion it is our business to

investigate. 1

Such empirical formalism simply obliterates the role of human goals in the pursuit of science, the search for a shared reality of human values. With Mach and then Wittgenstein, Kantian rationalism gives way to pure empiricist positivism. There is no “substance” behind concepts; there are no “things” behind facts; there is no “reality” behind sensations. The task of science is merely to con-nect these sensations or facts by means of hypotheses whose guiding principle must be that of “economy”.

But anyone who takes his stand as I

do on the economic function of science, according to which nothing is

important except what can be observed or is a datum for us, and

everything hypothetical, metaphysical and superfluous, is to be

eliminated, must reach the same conclusion. (fn1 at pp.27-8)

But what is a “datum”? Mach is deceived by the “given-ness” of facts as data, which are not “given” at all but “found” in the sense of “searched for” by the scientist, in-vestigated like “vestigia” (tracks), hunted for. The tragedy of positivism is to forget the “activity” (auctor, auctoritas), the exercise of decision and power behind the data or facts (from facere, human action) that are “found” or ascertained. Certainly, anything “superfluous” can be neglected – because it is “superfluous”. But what is superfluous relates to a particular line of research – and then we must ask, “Who decides what to research?” Similarly, the hypothetical cannot be abandoned – because all science starts with “hypotheses”. And the drives, the human needs that lead to hypotheses can reflect meta-physical goals. What, then, can be “the economic function of science”?


But when time and the means for achieving ends

are limited and capable of alternative application,

then behaviour necessarily assumes the form of choice.

Every act which involves time and scarce means for

the achievement of one end involves the relinquishment

of their use for the achievement of another. It


has an economic aspect.1

But economic science cannot prescribe what particular choice an individual must make “scientifically” for it to be “economic”, because from an individual’s point of view the “choice” cannot be dictated by considerations other than the “choice” itself. Given a “choice”, its implementation is a matter for engineering, not for “economics”. Clearly then, economics intervenes only when individual choices are in conflict (scarcity) with the choices of other individuals (Hayek on Walrasian equilibrium). There must be the possibility of “exchange” of “goods”. But this presumes the prior existence of “goods” as individual pro-ducts – hence, the division of social labour into “individual labours” – and then the prior existence of property rights.

There is a tautology of choice here in that choice is reduced to science, and an oxymoron in the sense that “choice” cannot be scientific if “science” is “objective”, that is to say, independent of “choice”. This applies to societies as well – because it is impossible to determine what the “scientific” way of maximizing choices is without first knowing what these “choices” have “in common” – their “interest”, perhaps a “market mechanism” to reach “equilibrium” (Hobbes’s paradox – how can self-interested individuals agree to form a society or set up a market?)

Choice necessarily involves “scarcity” – that is why a “choice” must be made. But this “choice” is not “economic” because there are no parameters by which the “choice” can be graded apart from, outside of, the “choice” itself! If I specify what my parameters for my “choice” are…. then I do not have a “choice”! My choice becomes a mere “calculus”. Both logic and mathematics are just calculi that do not involve “choice”. Choice is ineluctably “political”, it involves many “individuals”. But then economics must become “political economy” and can never be a “science of choice”.

Economics is the science which studies human behaviour

as a relationship between ends and scarce

means which have alternative uses.1

1 Cp. Menger, Orundsätze der Vólkswirtschaftslehre, lte aufl·, pp. 51-70;

Mises, Die Gemeinwirtschaft, pp. 98 seq.; Fetter, Economic Principles, ch. i.;

Strigl, Die ò'lconomischen Katagorien und die Organisation der Wirtschaft,

passim; Mayer, op. cit. (Robbins, p.15)

By rejecting the “classificatory” definition of economics, which refers to “material welfare”, Robbins espouses the “analytical” formalism of Mach and Wittgenstein (p.16). But by so doing he completely dis-embodies economics, divorcing it even from its most fundamental political element – one that even Menger could not ignore: - the exchange of goods (p.16-7).

One may realise completely the implications

for oneself of a decision to spend money in this way

rather than in that way. But it is not so easy to trace

the effects of this decision on the whole complex

of "scarcity relationships"—on wages, on profits, on

prices, on rates of capitalisation, and the organisation

of production. On the contrary, the utmost effort of

abstract thought is required to devise generalisations

which enable us to grasp them. For this reason

economic analysis has most utility in the exchange

economy. It is unnecessary in the isolated economy.

It is debarred from any but the simplest generalisations

by the very raison d'etre of a communist society. (Robbins cites Mises’s Gemeinwirtschaft, p.18)

[I]t is clear that the phenomena

of the exchange economy itself can only be explained

by going behind such relationships and invoking the

operation of those laws of choice which are best seen

when contemplating the behaviour of the isolated


For it is not

the materiality of even material means of gratification

which gives them their status as economic goods;

it is their relation to valuations. It is their form

rather than their substance which is significant. The

"Materialist" conception of economics therefore misrepresents

the science as we know it. (p.20)

Economics is not concerned at

all with any ends as such. It is concerned with ends

in so far as they affect the disposition of means. It

takes the ends as given in scales of relative valuation,

and enquires what consequences follow in regard to

certain aspects of behaviour. (P.29)

It is obvious that this ends-means definition of economics can stand its ground if it breaches the condition of universality that Robbins seeks to ascribe to it: if it is empirically and positivistically confined to the effects of human behavior under specific conditions of exchange – but not to the totality of exchanges - then economics becomes pure engineering or “technique” as Robbins calls it in this chapter on “Ends and Means”. But if it seeks to extend to all combinations of ends and means, then it is clear that “economic science” must also be able to prescribe the ends that are “economic” or “affordable” – which contradicts his categorical exclusion of “ends” from economic analysis earlier in the chapter: Robbins is then forced to amend his definition to include not just the choice of scarce means with regard to known or given ends, but rather also the choice of combinations of all ends and means:

[Th]e problem

of technique arises when there is one end and a

multiplicity of means, the problem of economy when

both the ends and the means are multiple.1(p.31)

In fact, the problem arises when the ends are “given”, not when there is only one end! If the ends being pursued by agents are known or “given” (as in Walrasian equilibrium where utility schedules are common knowledge), then the economic problem does not exist and the “solution” is pure engineering – “technical”. But where the ends are not discernible, then the problem becomes at once political and economic – it becomes political economy, never “economic science”!

Robbins is confusing a technical problem – the choice of appropriate means to given ends - with the essentially political nature of “economics”: the social relations behind capitalist production. This is why, from the piecemeal viewpoint of exchange transactions only, where it remains a “technical” tool, his definition of economic science misses out on the essential political characteristic of capitalism – the accumulation of social power as value, as command over living labour by means of its “exchange” with dead labour. It is the impossibility of this “exchange” that inspired Marx’s critique. Thus, “value” in economics – what lies behind market “prices” and is embodied in “money” – is an entity that cannot have a “scientific” or technical meaning, but one that is intrinsically political. His failure to understand this vital point is why Robbins entirely misunderstands the function of money, leaving out entirely its role as a “store of value” in a capitalist economy:

Money-making in the normal sense of the term is

merely the intermediate stage between a sale and a

purchase. The procuring of a flow of money from the

sale of one's services or the hiring out of one's property

is not an end per se. The money is clearly a means to

ultimate purchase. It is sought, not for itself, but for

the things on which it may be spent—whether these

be the constituents of real income now or of real

income in the future. Money-making in this sense

means securing the means for the achievement of all

those ends which are capable of achievement by the

aid of purchasable commodities. Money as such is

obviously merely a means—a medium of exchange,

an instrument of calculation. For society, from the

static point of view, the presence of more or less money

is irrelevant. For the individual it is relevant only

in so far as it serves his ultimate objectives. Only the

miser, the psychological monstrosity, desires an infinite

accumulation of money. (P.30)

Money is much more than just a means of exchange and a unit of account – “a means of calculation” as Robbins clumsily puts it. Money is above all a store of value: it is the necessary expression of political relations pertaining to the exchange of living with dead labour (pro-ducts or goods or commodities). And the aim of capitalism is precisely “the infinite accumulation of money” as the embodiment of political power through the “exchange” of dead labour with dead labour! The miser Robbins has in mind – “the psychological monstrosity” – intends precisely to reach the Nirvana that is “the satisfaction of all needs” through the renunciation (Schopenhauer’s Entsagung) of present consumption! This is the crucial point behind the theory of capital in both Menger and then Bohm-Bawerk.