A good, old-fashioned crisis of capitalism – a disruption that rocks the whole system – produces one salutary result: wiser heads, serious students begin to re-examine widely held assumptions and popular theories of political economy. For those few, this may mean dusting off old copies of the works of Keynes, Schumpeter, or Minsky, and – only too rarely – Marx. For the honest observer, the crisis is an opportunity for a deeper understanding of the capitalist mechanism and its direction.
But others cling to the comforting views of infallible markets and perfect rationality that prevailed until recently, while amending their theories with warning labels touting the current crisis is a special case falling outside of the economic canon. Most economists, pundits, and policy makers fall into this latter category. They got it wrong and they continue to get it wrong. They have too great of an investment in the ideologies, careers, and honors of the past.
There is now a long list of books and papers offering explanations, in part or wholly, of what went wrong with the global economy. The worst of these offer simple and immediate answers: evil bankers, irrational borrowers, lax regulators, etc. The best offer longer and deeper views that locate problems in the evolution of capitalism and its inner mechanisms. They contest the too human urge for simple answers and easy solutions. Zoltan Zigedy
Joseph Stiglitz is one of the few courageous enough to peek beyond the curtain of official dogma and smugness. Though a prominent and celebrated economist, he has dared to challenge many of the assumptions of the neo-classical model dominating his profession, thus, earning our measured respect. He is deservedly an “outsider”.
In a recent article in the London Review of Books (“The Non-Existent Hand”), Stiglitz has much to say about the causes of the crisis and those who failed to see it coming. He reminds of his own work in debunking the infallibility of markets. He and others (such as Akerlof and Shiller) have demonstrated what should not have needed demonstration: markets are often not efficient, not self-correcting, nor rational. Despite its euphoric embrace over the last thirty years, the perfection of markets never earned the theoretical or empirical right to be elevated to a timeless truth rather than a fervent faith. Nevertheless, it was.
For Marx, commodity exchange – the human relationship that stands behind what we call “markets” – may well be to some extent efficient and rational on the level of individual interactions, far from determinant of social efficiency and justice and collective rationality. There is no reason to expect that the profit-optimizing behavior of individual capitalist enterprises in the market will in any way optimize social or collective interests (including the health of the capitalist system). I think Keynes would agree.
If only Stiglitz were right: “The present crisis should lay to rest any belief in ‘rational’ markets.”
Stiglitz quickly dismisses those who hope to account for the crisis by distinguishing between “risk” and “uncertainty”. He correctly points out that the difference is really a slippery slope, the actors indeed believed they were possessed of statistical models that promised low risk, and they were drawn by high expected outcomes. Yet he misses the larger point – the fallacy of aggregation – that allows that what might be of reasonable risk for one actor, may not be a reasonable risk for the system if all the actors take on that risk. Aggregating all the risk-taking that individual enterprises take may well multiply the risk to the system beyond that of the seemingly sensible risks undertaken by each and every of the enterprises comprising that system. Stiglitz cannot escape the limits of neo-classical economics that rigidly assumes that all system-wide behavior is simply and coherently reducible to the behavior of the individual units.
Stiglitz perceptively focuses on one of the anomalies of the current crisis and its supposed recovery: the intractability of high unemployment (“why the usual laws of supply and demand, which should result in full employment, have failed to work.”). He elaborates: “Standard economic theory - the theory of demand and supply that is taught in classrooms around the world – says that if prices… are fully flexible and markets function as they should, then… there should be full employment.” This challenge to standard theory grows more apparent with the expansion of production and GDP, beginning in 2009. With the standard view, the crisis would reduce the costs of labor (which it did), resulting in a strong incentive, with recovery, to utilize labor over other factors of production. But no such expansion of employment has occurred.
This is only an anomaly if one fails to assign a central role to profit and exploitation in one’s economic theory. Capitalists are only pragmatically interested in the theory of supply and demand; their real interest is in maximizing profit and their behavior reflects this fixation. Consequently, they follow the path that produces gain regardless of the intuitions of academic economists. As I have written, perhaps ad nauseam, the explosion of exploitation measured by unprecedented increases in labor productivity since early last year has resulted in strong, persistent, and almost unprecedented profit growth. Why would a capitalist hire more workers with profit expanding?
Moreover, those countries that have protected employment as a matter of policy – enforcing labor market rigidity – have often weathered the crisis as well or better than those with “flexible” labor markets, a point that Stiglitz concedes. And there has been little employment growth since the bottom of the crisis in any country, regardless of whether it had a relatively rigid labor market – like Germany – or a flexible labor market – like the US. Unemployment remains high independently of private sector regulation or stimulus. The hard lesson of the Great Depression that the public sector must take up the slack in employment during a severe crisis has apparently been spurned today.
Of course conventional neo-classical economics permits of productivity increases as a source for growth, but it finds no reason to distinguish between productivity gains that are exploitative and those that are not. But the capitalist certainly does.
The neo-classical economist has a problem beyond the current intractability of unemployment in the US – the entire decade since the “dot-com” crisis has been one of a “jobless recovery” with employment recovery drastically trailing production and GDP growth. In short, profit growth has decoupled from employment growth in this last period, replaced by super-exploitation and the concentration and rationalization of production.
Stiglitz does offer an explanation for the anomaly of persistent unemployment, an explanation that has been conventional since the era of Keynes. At the end of the day, he argues, unemployment persists because of an insufficiency of aggregate demand; there is simply too much productive potential to be absorbed by those able and willing to buy. A corollary of this lack of demand is the decline of investment opportunities; the capitalist finds fewer and fewer avenues for pursuing profits.
Stiglitz locates the lack of aggregate demand in two factors: savings on the part of developing countries (to protect them from the onerous policies of the IMF and the banks of developed countries!) as well as reserves accumulated by oil producing countries (for insurance against price fluctuations) and, secondly, the “huge increase in inequality, which in effect redistributed money from those who would spend it to those who didn’t…” The last point hints at the systemic problem facing capitalism.
Stiglitz is right, but only partially right. The problem of “savings” was, in reality, a problem of declining profitability throughout the capitalist system. I wrote in November of 2005 (“Capital Surplus, Marx, and Crisis”) of “the world economy awash in accumulated money, an enormous pool desperate to accumulate even more capital… the ability to make further money is now impeded. Capitalists are finding fewer and fewer investment opportunities. And when they find them, they offer at best modest returns.” I cited the Wall Street Journal, quoting Gerd Hausler of the IMF: “The search for yield has been the defining factor in financial markets for roughly the last two years.” In my view, this was a harbinger of a possible crisis of capitalism, an instantiation of the tendency of the rate of profit to decline, the touchstone of Marx’s theory of crisis.
For Stiglitz, the lack of investment opportunity demonstrated by the “Great Recession” was circumstantial, an extraordinary event brought on by contingent events in the world economy; in my view, and I believe from an understanding of Marx, the glut of capital in search for investment returns was inherent in the capitalist system and one that would lead unerringly to a crisis. One can thus understand the frenzy that led to sub-prime mortgages, exotic investment instruments, insider trading, and market manipulation as desperate and risky attempts to restore a higher rate of profit.
The word “profit”, and even its euphemisms “yield” and “return”, is curiously missing in Stiglitz’s account. In only one instance does he employ the word “profit”: “The objective of a speculative attack is to generate profits for the speculators, regardless of the cost to society.” Surely he understands that this is the objective of all capitalist enterprises! From Goldman Sachs to Nike, from AIG under government guidance to bailed-out GM, the goal is to generate profits “regardless of the costs to society.” Otherwise, how does one explain the millions of laid-off workers and the enormous bail-outs directed to executive bonuses and mergers and acquisition? I’ve yet to see a “cost to society” in the balance sheet of a monopoly-capitalist corporation.
In passing, Stiglitz offers the following interesting comment about the state of matters today: “The Hooverites – the advocates of the pre-Keynesian policies according to which downturns were met with austerity – are having their revenge. In many quarters, the Keynesians, having enjoyed their moment of glory just a year ago, seem to be in retreat,” While there was little difference between the late Hoover policies (NCC and RFC) and the early New Deal (just as there is a continuity between late-Bush and Obama’s first year), he is sadly correct. The progressive and left movement has lost the initiative to the oracles of neo-liberalism who scream “Deficits!” at every opportunity. Lethargy and unwarranted faith in the Obama administration has robbed the left and progressive forces of a rare opportunity to move decisively beyond the neo-liberal model. We are, in too many ways, back where we started.
Stiglitz closes with the following – no doubt sincere - reflection: “Keynes great contribution was to save capitalism from the capitalists… Keynes insights are needed now if we’re to save capitalism once again from the capitalists.”
But facing another wave of capitalist excess, why do we want to save capitalism at all? May I suggest that saving humanity from capitalism is a far more urgent and proper demand?
This is the first of a series of articles discussing the important contributions of liberal, progressive, and left commentators on the economic crisis.