Keynes and Capitalism
AN ENTERPRISE'S RATE OF PROFIT is ihe ratio of the amount of profits it makes, say in a year, to the money-value of its assets at the beginning of that year. The average rate of profit of the whole economy is the ratio of total profit to total capital.The rate of profit would tend to fall if over time the amount of the total capital tended to increase at a faster rate than the total amount of profits.
This fall tends to happen as a result of the increasing amount of old wealth that must be used as fixed equipment in producing new wealth (or, what amounts to more or less the same thing, to the increasing size of the means of production in relation to the amount of human labour needed to operate them). Because there are so many offsetting factors, this tendency for the average rate of profit to fall only becomes evident in the very long run and so could not explain the onset of a much shorter term occurrence like a slump.
What else, then, could cause the rate of profit to fall? The ratio would also be reduced if for some reason the amount of profits made on the same amount of capital were to fall. Since profits are what is left after part of the newly created wealth has been allocated for consumption by wage-earners, then they would fall if wages were to rise.
The law of wages tends to keep wages down to what the workforce must consume to reproduce itself and keep fit for work, but wages are a price and so subject to the influence of supply and demand. Wages are the price of the skills wage-earners sell to enterprises so the market demand for these skills depends on the amount and kind of work enterprises want done. As the economy expands and as more and more workers are employed, then the level of more or less full employment of the workforce will be reached. At this point the market demand for workers' skills will begin to exceed the market supply: wages will tend to rise, eating into profits. The rate of profit would then tend to fall.
Rising wages eating into profits is only one possible cause. Another would be a miscalculation by a group of enterprises about the size of the market they supplied. The resulting oversupply in that particular market, and the resulting cut¬back in production for it would have a cumulative effect on the profits of other groups of enterprises and so on the economy as a whole. The particular market oversuppiy would then, through affecting general profit prospects, have become a general market oversupply and lead to idle productive capacity.
Despite the regular occurrence of slumps the general trend has been for the amount of wealth in the world, especially means of production, to increase. This means that in practice enterprises have been able to find profitable investments. These they have found in two main areas. First, in meeting the market demand for new equipment which is continually being created as the competitive struggle for profits forces enterprises to innovate in order to reduce costs. Second. in meeting the market demand created by the extension of exchange relationships into more and more parts of the world.
Slumps, in this light, appear as temporary setbacks to economic growth from which the system always recovers. Slumps (during which total market demand falls short of existing productive capacity) are the opposite of booms (during which total market demand exceeds existing productive capacity). Booms and slumps are in fact two sides of the same coin: they are complementary phases of the business cycle and the course which long-term growth follows.
But can there not be steady growth? Although the decision-making structure of the exchange economy is chaotic, the structure of production itself is extremely systematic with each workplace being an inter-dependent part of a world-wide system. This is why decisions made by enterprises controlling one part of this system are bound to affect the profit prospects of enterprises controlling other, especially closely related parts. It is also why a miscalculation in one sector can have a cumulative effect on the whole economy.
Leaving aside any instability introduced by changes in ihe rate of profit, in order to avoid booms and slumps there would have to be balanced growth of all the sectors of the economy. Each sector would have to expand at a given rate determined by its place in the productive system. This wouid require a degree of central co-ordination quite impossible so long as control over the parts of the system is scattered among thousands and thousands of profit-seeking enterprises. The anarchy which results from this makes balanced growth quite impossible.
SAVING CAPITALISM?
The man generally credited with having "saved capitalism" is the English economist John Maynard Keynes whose main work appeared in i936, Writing in the middle of the great slump of that period, he couid see that Say's Law, as the dogma that total market demand would always be equal to existing productive capacity, was wrong. He showed how, due to what amounted to hoarding of profits (which he called "liquidity preference"), there couid be a lack of market demand. He went on to claim, however, that this could be permanent, that even in the long run existing productive capacity wouid not necessarily be fully used. This places Keynes in the camp of the lack-of-market-demand school of economists.
Keynes was saying in effect that there was no reason to believe that the system would always recover from a slump: the lack of market demand might be permanent and lead to a permanent slump, to state of stagnation. He believed that the tendency of the economic system was towards such a state of stagnation. As the amount of capital in the world increased, he argued, so the rate of profit would tend to fall, thereby discouraging investment. At the same time people would be choosing tc spend a smaller and smaller part of their rising incomes on consumer goods, thereby discouraging consumption. But this would mean, he went on, a falling market demand since market demand is composed of investment (purchase of producer goods) and consumption (purchase of consumer goods).
Keynes' solution was for the State to intervene and take steps to encourage investment and consumption. Investment could be increased by the State increasing its spending, while consumption could be raised by taxing the incomes of the rich and giving some of it to the poor (on the principle that many poor people will spend more on consumer goods than a few rich people).
A theory or permanent slump was obviously attractive in the 1930s. But even then it was wrong. One way or another — by the planned physical destruction of "excess" productive capacity on a massive scale, if need be — capitalism can in time always recover from a slump. I: was the war and then repairing the damage the war caused — not Keynsian policies — wb:ch ended the slump of the 1930s. Since then the world exchange economy has resumed its growth, still punctuated by booms and slumps, misieadingiy called "stop-go" to givs the illusion that these fluctuations are the result of deliberate government policies rather than the normal working of the unpiannabie exchange economy. The Keynesians have the cheek to claim that the very event which proved their stagnation thesis wrong — the post-war re-expansion of capitalism — was the result of the adoption of their policies. Keynes did not "save capitalism" since, in the absence of a successful movement to abolish it, the system was capable of "saving" itself.
That the profit-motivated exchange economy tends towards a permanent slump brought about by a chronic lack of market demand has long been a view popular among reformers of the system. Keynes seemed to have confirmed their views: they in turn, have tacitly accepted his views. For in explaining, as many of them do, capitalism's survival by State spending on armaments they are in effect conceding Keynes' claim that States can engineer the "full employment" of the workforce within their frontiers.
That States do in fact possess such a power is very much open to question. They do not intervene in the capitalist economy from outside but rather are themselves essential parts of it, and have to rely for every item of wealth they consume on what they can obtain from enterprises, non-State as well as State. This means that State spending is ultimately limited by the amount of profits made by enterprises, or rather by the amount of profits it can take from enterprises without thereby reducing their incentive to invest or damaging their competitive standing in the world market. For, as explained in a previous article, State spending ;s a charge on profits, a cost enterprises have to bear and one which, like all costs, they want kept to a minimum.
STATE SPENDING
It is true that over the years State spending, as a proportion of total market demand, has tended to increase. But this has not been the result of a conscious policy aimed at saving capitalism from collapse. Rather has it been due to enterprises handing over to the State the responsibility for carrying out certain and increasingly costly non-productive services like health and education and to the increasing cost of maintaining and equipping the armed forces (another essential service as far as enterprises are concerned).
A growing number of people directly employed by the State in non-productive work will have some effect on the working of the exchange economy because the kind of work the State employs these people to do is not so dependent on market conditions as work done for enterprises. So will the growing demand of the State for buildings and equipment (schools and hospitals as well as armaments) to carry out this work. But these developments would mean that a slump, insofar as it affects employment, might tend not to spread as far as it would if wage-earners were employed by enterprises rather than the State. On the other hand, States do have to cut their spending when enterprises are suffering from lowered profits and are curtailing production, precisely because profits are the ultimate source of the money which States spend. This happens even though, in Keynsian theory, they should rather be increasing their spending.
The idea behind the State spending during a slump is that the State should take over and spend the profits enterprises are hoarding. If States were to do this, then it is possible they might help to speed recovery by closing the gap between market demand and existing productive capacity. But States do not act in this way because to tax away the hoarded profits of enterprises during a slump would only make matters worse. Enterprises would be discouraged from investing even that part of their profits they had continued to. The increased State spending would then be offset by the decreased investment of enterprises.
States prefer to get the money to spend during a slump by printing it themselves. Actually they do not usually do it as directly as that. What they do is to increase the National Debt by borrowing more and then repaying part of the debt and the interest in newly-printed money (or rather money-tokens). This of course is a policy of currency depreciation or inflation. Keynes believed that the rise in prices caused by depreciating the currency in this way would encourage enterprises to invest rather than hoard their profits. Whether or not he was right, one result of Keynsian doctrines has been permanent inflation, it is no accident that prices have been rising in Britain since 1940, the year of the first Keynsian budget. For, although States have not adjusted their spending in accordance with Keynes' theories, they have chosen to finance some of it by a policy of inflation. This has certain internal political advantages (Keynes himself pointed out that it is easier to keep wage-earners' living standards down by raising prices more than money wages than by reducing money wages in line with falling prices), but has definite external disadvantages. Rising prices at home means increasing costs in relation to the world market, a fact which places another limit on the extent of State spending.
Even if the State were itself to take over direct responsibility for all investment by establishing a state capitalist economy within its frontiers, it could still not escape the dictates of the world market. The State enterprises set up in place of the old non-State ones would still have to take part in the world-wide competitive struggle for profits. State spending would still be limited by how successful these enterprises were in that struggle. And the State would still be compelled to keep the consumption of its wage-earners to a minimum, as the experience of States like Russia which have tried this policy has shown.
Rather than States being able to control the capitalist economy as Keynes taught, it is the other way round. States have to trim their policies to the changing conditions brought about by the world capitalist economy as it expands and contracts.
The world economy needs to keep millions of people, some permanently and some for shortish periods, out of non-productive as well as productive work. A pool of unemployed is needed for two reasons. First, so that competition among wage-earners for jobs will prevent wages from rising and eating into profits. Where unemployment has been relatively low, as it was until recently in some of the industrialised parts of the world, the States there have implicitly recognised this by adopting policies of planned wage restraint as a substitute. Secondly, enterprises need a reserve of unemployed workers they can call on to work for them during the periods when they are expanding production. The bulk (but by no means all of the world's unemployed) are located in the industrially backward parts of the world which have supplied large numbers of extra workers for enterprises in the industrially advanced parts. Hence the migration of the unemployed to Europe and North America.
THE CASE AGAINST CAPITALISM
The full charge sheet against the world exchange economy with regard to the way it forces people to use the world's resources can now be drawn up. It reads:
(1) That, although there has been a long-term expansion of productive capacity and oil output, this has been only a fraction as fast and as extensive and as safe as technology has made possible.
(2) That, although in the long run the existing capacity has been more or less fully used, this has been broken by regular periods of under-use.
(3) That, in agriculture and in industries faced with declining markets, there has been deliberate destruction of productive capacity and regular destruction of wealth.
(4) That millions and millions of human beings who could have contributed to producing useful things have been prevented from working at all.
(5) That millions and millions more human beings have been allowed to work but only to engage in wasteful exchange and coercive activities.
(6) That the existing productive capacity has been used to produce considerable amounts of waste.
These are all serious charges and all of them are proved. They point to the need for the world's people to recover control over the productive system by abolishing the exchange economy altogether and replace it by a society that will allow them to plan the production of wealth in their own interests and to allocate the products for their own individual and collective use.
ALB. Socialist Standard, May 1979
(Concluded.)
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Questions of the Day (part 16)
Inflation and unemployment
IN THE LAST QUARTER of the nineteenth century, during what was known at that time as The Great Depression, and again in the depression between the two world wars, an increasing number of workers — and even some professional economists — were paying attention to the analysis of capitalism made by Karl Marx in his work Capital. Marx showed that unemployment, and its rise to peak levels in periodical phases of trade depression, arise put of the structure of capitalism itself, and are therefore inevitable while capitalism lasts.
This growing interest in Marx was all but extinguished with the publication in 1936 of J. M. Keynes' The General Theory of Employment, Interest and Money. According to the new doctrine it only needs that the government "manage the economy in such a way as to maintain demand" for full employment to be created and trade depressions to be abolished.
Keynes described Marx's Capital as "an obsolete economic textbook, which I know to be not only scientifically erroneous but without interest or application for the modern world" ("A Short View of Russia", J. M. Keynes, 1925. p 14). Keynesian doctrines were accepted by most economists, political parties and the trade unions. Writing in 1957 (Remedies for Inflation) Mr. (now Sir Harold) Wilson stated that the Labour Party and all other "major parties" were Keynesian. As late as 1974, in spite of the evidence that Keynesian techniques had been a failure, the Tory M.P. Mr. Peter Walker called his party "the party of Keynes and Disraeli"; while the Liberal M.P. Mr. John Pardoe said that the Liberal Party is "the party of Keynes and William Beveridge".
Alone in this country the Socialist Party of Great Britain insisted from the outset that Marx was right; that the new doctrines were fallacies; that full employment cannot be maintained; that trade depressions cannot be eliminated, that the remedies proposed were only disguised inflation and would do nothing to serve working-class interests.
The Labour Party adopted the new policy at its Annual Conference in 1944, in a Report on Full Employment and Financial Policy, which declared:
"If bad trade and general unemployment threaten this means that total purchasing power is falling too low. Therefore we should at once increase expenditure .... We should give people more money and not less, to spend."
The Tory Party was committed to a similar view; but such was the confusion created by Keynes' theories that neither Party recognised that this is a policy of the crudest inflation. So at every general election in the post-war years they continued to declare their opposition to inflation. Both parties pledged themselves to maintain "full employment", defined in the Labour Party's 1945 General Election programme as "Jobs for All".
In the history of capitalism, as Marx had explained, periods of good trade and low unemployment alternate with periods of bad trade and high unemployment. One such period of low unemployment occurred in the years immediately following the second world war (helped by work on making good war damage); but Labour and Tory Governments both claimed this to be evidence of their success in "managing the economy". From 1955 onwards, however, unemployment has been on a sharp upward trend, each peak of unemployment rising to a higher level — to 747,000 in 1963, to above a million under the Heath Government in 1972, and to 1,500,000 in 1976 under Labour Government, and to over 1,600,000 in July 1977, This was capitalism operating in its normal way; but it led many who had wrongly believed that Keynesian techniques would abolish unemployment to reach the false opposite conclusion: that it was those techniques that had been the cause of unemployment. The Times,13 February 1976, told its readers that "unemployment ... will decline as fast and as soon as we all forget Keynes".
But if Keynesian policies did nothing for unemployment, their effect on prices was that by 1977 the general level was ten times what it had been in 1938, and was rising fast.
Inflation is caused by governments going on year after year printing and putting into circulation hundreds of millions of pounds of additional paper money.
Wherever and whenever currency has been issued in excess, the price level has risen; and wherever and whenever currency has been restricted, prices have stabilised or fallen. In the period 1920-23, the printing presses of the German central bank were busy day and night pouring out notes, and prices were rocketing upwards. In Britain in the same three year period the Government had decided to halt inflation; the note issue was restricted and prices were falling fast.
Inflation is not the only factor affecting prices. In Britain, in the 90 years before 1914 when there was no inflation (the price level in 1914 being below that of 1820), prices rose moderately in trade booms and fell again in periods of bad trade, a process also explained by Marx.
The reason there was no inflation in Britain in the century before 1914, was that through the operation of the gold standard the note issue was controlled. Beyond a fixed low limit the Bank of England could not issue additional notes without adding an equivalent amount of gold to the reserve in its vaults. Also the notes, by law, were freely convertible into a fixed amount of gold — one pound or a sovereign being fixed at about a quarter of an ounce of gold. Gold coins and Bank of England notes both circulated; but because of legally enforced convertibility a Bank of England note "was as good as gold", and the combined circulation of notes and gold coins was equivalent to the circulation of a total amount of gold.
Marx showed that if that total amount of gold is replaced by inconvertible paper money, and if the amount of that paper money is then issued in excess, prices are pushed up accordingly.
"If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one quarter of an ounce .... The values previously expressed by the price £1 94 will now be expressed by the price £2" (Capital, VoL 1.
Allen & Unwin Edition, p. 108).
Governments since 1938 have followed the policy of continually increasing the amount of currency in circulation, from under £500 million in 1938 to over £7,000 million in 1977, an increase far beyond any increase that would have been necessary because of the expansion of total production and trade. In 1976 and 1977 when the Government claimed that its "wages and incomes policy" would curb inflation the flood of additional paper money went on without interruption.
The man, more than any other, who was responsible for abandoning the nineteenth-century policy of controlling the amount of paper money was J. M. Keynes, who declared that it was no longer necessary "to watch and to control the creation of currency".
So for 40 years the major British political parties and the trade unions have been misled by the Keynesian policy of inflation into believing that capitalism could be rid of unemployment and trade depressions. It failed as it was bound to do with the market conditions and 'free' labour conditions of the western world.
Marx showed, and subsequent events have confirmed his analysis of capitalism's economic laws, that, arising from capitalism's inescapable anarchy of production, its progression is the cycle of moderate expansion of production and sales, then boom, then crisis, then depression. But just as there is no Keynesian device which will secure conditions of permanent boom, so there is no such thing as a permanent depression or "collapse of capitalism". (In the middle of "The Great Depression" Frederick Engels, three years after the death of Marx, did temporarily hold that Marx's cycle had ceased to operate and put forward a theory of "Permanent Depression"; but events soon showed this to be wrong and he returned to Marx's view — Preface to Capital 1886.)
In a depression, with bankruptcies which remove competitors, stocks of unsold goods disposed of, wages restrained by unemployment, and raw material prices and interest rates forced down, sooner or later conditions return restoring prospects of making a profit and capitalism expands again: but only to repeat the cycle. There is, however, one kind of 'collapse' that can occur, a collapse of the currency if the excess issue is expanded to the point where the currency as Marx put it "falls into general disrepute", and nobody wants to hold or receive paper money.
Although he only half understood the problem, such a situation was foretold by Herman Cahn in his Collapse of Capitalism published in 1919. What he foretold as inevitable, like an "Act of Nature", was that "within a few years" (or within a year if the war continued), there would be collapse and "social chaos"; out of which, though the workers were not prepared for it, Socialism would arise.
A currency collapse was at that time on the way in the great German inflation (by contrast the British Government had decided in that year to halt it). By December 1923 inflation in Germany had reached fantastic proportions and unemployment had risen to 30 per cent of workers registered as unemployed, an unknown number not registered, and 42 per cent on short time. There was indeed "social chaos" while a new currency was issued and conditions got back to normal. But chaos does not produce Socialism. In Germany it helped to prepare the way for the rise to power of the Nazi Party under Hitler.
The situation in Britain in 1977 is that, although Keynesian inflation has lost many of its adherents, the Keynesians have not given up the struggle. Under the name of 'reflation' it is still being pushed by the T.U.C., by some professional economists, by Labour Party leaders and by some of the Tories and Liberals. (Most of the 'Left-wing' organisations are all for it.) If the inflationists have their way they could produce a currency collapse here. The dilemma of all parties is that if they abandon the Keynesian belief that unemployment and depression can be eliminated under capitalism, what can they do except face the alternative — fearful for them — of getting rid of capitalism?
Some politicians and economists are now urging a return to the nineteenth century gold standard in order to get rid of inflation.
It only needs to add that getting rid of inflation is not the answer. Capitalism without inflation, as in the nineteenth century, no more solves working class problems than does capitalism with inflation, as in the years since the end of the second world war.
Further Reading
Marx versus Keynes SPGB education document
The Marxian Theory of Inflation SPGB education document
the Edgar Hardcastle Internet Archive
IN THE LAST QUARTER of the nineteenth century, during what was known at that time as The Great Depression, and again in the depression between the two world wars, an increasing number of workers — and even some professional economists — were paying attention to the analysis of capitalism made by Karl Marx in his work Capital. Marx showed that unemployment, and its rise to peak levels in periodical phases of trade depression, arise put of the structure of capitalism itself, and are therefore inevitable while capitalism lasts.
This growing interest in Marx was all but extinguished with the publication in 1936 of J. M. Keynes' The General Theory of Employment, Interest and Money. According to the new doctrine it only needs that the government "manage the economy in such a way as to maintain demand" for full employment to be created and trade depressions to be abolished.
Keynes described Marx's Capital as "an obsolete economic textbook, which I know to be not only scientifically erroneous but without interest or application for the modern world" ("A Short View of Russia", J. M. Keynes, 1925. p 14). Keynesian doctrines were accepted by most economists, political parties and the trade unions. Writing in 1957 (Remedies for Inflation) Mr. (now Sir Harold) Wilson stated that the Labour Party and all other "major parties" were Keynesian. As late as 1974, in spite of the evidence that Keynesian techniques had been a failure, the Tory M.P. Mr. Peter Walker called his party "the party of Keynes and Disraeli"; while the Liberal M.P. Mr. John Pardoe said that the Liberal Party is "the party of Keynes and William Beveridge".
Alone in this country the Socialist Party of Great Britain insisted from the outset that Marx was right; that the new doctrines were fallacies; that full employment cannot be maintained; that trade depressions cannot be eliminated, that the remedies proposed were only disguised inflation and would do nothing to serve working-class interests.
The Labour Party adopted the new policy at its Annual Conference in 1944, in a Report on Full Employment and Financial Policy, which declared:
"If bad trade and general unemployment threaten this means that total purchasing power is falling too low. Therefore we should at once increase expenditure .... We should give people more money and not less, to spend."
The Tory Party was committed to a similar view; but such was the confusion created by Keynes' theories that neither Party recognised that this is a policy of the crudest inflation. So at every general election in the post-war years they continued to declare their opposition to inflation. Both parties pledged themselves to maintain "full employment", defined in the Labour Party's 1945 General Election programme as "Jobs for All".
In the history of capitalism, as Marx had explained, periods of good trade and low unemployment alternate with periods of bad trade and high unemployment. One such period of low unemployment occurred in the years immediately following the second world war (helped by work on making good war damage); but Labour and Tory Governments both claimed this to be evidence of their success in "managing the economy". From 1955 onwards, however, unemployment has been on a sharp upward trend, each peak of unemployment rising to a higher level — to 747,000 in 1963, to above a million under the Heath Government in 1972, and to 1,500,000 in 1976 under Labour Government, and to over 1,600,000 in July 1977, This was capitalism operating in its normal way; but it led many who had wrongly believed that Keynesian techniques would abolish unemployment to reach the false opposite conclusion: that it was those techniques that had been the cause of unemployment. The Times,13 February 1976, told its readers that "unemployment ... will decline as fast and as soon as we all forget Keynes".
But if Keynesian policies did nothing for unemployment, their effect on prices was that by 1977 the general level was ten times what it had been in 1938, and was rising fast.
Inflation is caused by governments going on year after year printing and putting into circulation hundreds of millions of pounds of additional paper money.
Wherever and whenever currency has been issued in excess, the price level has risen; and wherever and whenever currency has been restricted, prices have stabilised or fallen. In the period 1920-23, the printing presses of the German central bank were busy day and night pouring out notes, and prices were rocketing upwards. In Britain in the same three year period the Government had decided to halt inflation; the note issue was restricted and prices were falling fast.
Inflation is not the only factor affecting prices. In Britain, in the 90 years before 1914 when there was no inflation (the price level in 1914 being below that of 1820), prices rose moderately in trade booms and fell again in periods of bad trade, a process also explained by Marx.
The reason there was no inflation in Britain in the century before 1914, was that through the operation of the gold standard the note issue was controlled. Beyond a fixed low limit the Bank of England could not issue additional notes without adding an equivalent amount of gold to the reserve in its vaults. Also the notes, by law, were freely convertible into a fixed amount of gold — one pound or a sovereign being fixed at about a quarter of an ounce of gold. Gold coins and Bank of England notes both circulated; but because of legally enforced convertibility a Bank of England note "was as good as gold", and the combined circulation of notes and gold coins was equivalent to the circulation of a total amount of gold.
Marx showed that if that total amount of gold is replaced by inconvertible paper money, and if the amount of that paper money is then issued in excess, prices are pushed up accordingly.
"If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one quarter of an ounce .... The values previously expressed by the price £1 94 will now be expressed by the price £2" (Capital, VoL 1.
Allen & Unwin Edition, p. 108).
Governments since 1938 have followed the policy of continually increasing the amount of currency in circulation, from under £500 million in 1938 to over £7,000 million in 1977, an increase far beyond any increase that would have been necessary because of the expansion of total production and trade. In 1976 and 1977 when the Government claimed that its "wages and incomes policy" would curb inflation the flood of additional paper money went on without interruption.
The man, more than any other, who was responsible for abandoning the nineteenth-century policy of controlling the amount of paper money was J. M. Keynes, who declared that it was no longer necessary "to watch and to control the creation of currency".
So for 40 years the major British political parties and the trade unions have been misled by the Keynesian policy of inflation into believing that capitalism could be rid of unemployment and trade depressions. It failed as it was bound to do with the market conditions and 'free' labour conditions of the western world.
Marx showed, and subsequent events have confirmed his analysis of capitalism's economic laws, that, arising from capitalism's inescapable anarchy of production, its progression is the cycle of moderate expansion of production and sales, then boom, then crisis, then depression. But just as there is no Keynesian device which will secure conditions of permanent boom, so there is no such thing as a permanent depression or "collapse of capitalism". (In the middle of "The Great Depression" Frederick Engels, three years after the death of Marx, did temporarily hold that Marx's cycle had ceased to operate and put forward a theory of "Permanent Depression"; but events soon showed this to be wrong and he returned to Marx's view — Preface to Capital 1886.)
In a depression, with bankruptcies which remove competitors, stocks of unsold goods disposed of, wages restrained by unemployment, and raw material prices and interest rates forced down, sooner or later conditions return restoring prospects of making a profit and capitalism expands again: but only to repeat the cycle. There is, however, one kind of 'collapse' that can occur, a collapse of the currency if the excess issue is expanded to the point where the currency as Marx put it "falls into general disrepute", and nobody wants to hold or receive paper money.
Although he only half understood the problem, such a situation was foretold by Herman Cahn in his Collapse of Capitalism published in 1919. What he foretold as inevitable, like an "Act of Nature", was that "within a few years" (or within a year if the war continued), there would be collapse and "social chaos"; out of which, though the workers were not prepared for it, Socialism would arise.
A currency collapse was at that time on the way in the great German inflation (by contrast the British Government had decided in that year to halt it). By December 1923 inflation in Germany had reached fantastic proportions and unemployment had risen to 30 per cent of workers registered as unemployed, an unknown number not registered, and 42 per cent on short time. There was indeed "social chaos" while a new currency was issued and conditions got back to normal. But chaos does not produce Socialism. In Germany it helped to prepare the way for the rise to power of the Nazi Party under Hitler.
The situation in Britain in 1977 is that, although Keynesian inflation has lost many of its adherents, the Keynesians have not given up the struggle. Under the name of 'reflation' it is still being pushed by the T.U.C., by some professional economists, by Labour Party leaders and by some of the Tories and Liberals. (Most of the 'Left-wing' organisations are all for it.) If the inflationists have their way they could produce a currency collapse here. The dilemma of all parties is that if they abandon the Keynesian belief that unemployment and depression can be eliminated under capitalism, what can they do except face the alternative — fearful for them — of getting rid of capitalism?
Some politicians and economists are now urging a return to the nineteenth century gold standard in order to get rid of inflation.
It only needs to add that getting rid of inflation is not the answer. Capitalism without inflation, as in the nineteenth century, no more solves working class problems than does capitalism with inflation, as in the years since the end of the second world war.
Further Reading
Marx versus Keynes SPGB education document
The Marxian Theory of Inflation SPGB education document
the Edgar Hardcastle Internet Archive
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