Giorgos Stamatis-The economic crisis and the delusions concerning its overcoming (Pt. 1)

Giorgos Stamatis

The economic crisis and the delusions concerning its overcoming

Theseis 15, April-June 1986

Translation: In Defense of Greek Workers

The economic crisis that is hitting capitalist countries today broke out in the beginning of the 1970s. It is therefore well into its second decade.

I will not here deal with its causes, but with certain of its aspects that I think are of particular interest.

The crisis itself was initially expressed in the form of a decrease of the rate of the employment of labor, that is to say, in the form of an increase of unemployment; and in the form of the decrease of the rate of the employment of capital. The decrease in the rate of employment of labor and of capital had stagnation as their immediate consequence, and sometimes also resulted in the decrease of the GNP.

According to the view and practice that was dominant until the end of the 1960s, governments in such cases must respond through an anti-cyclical policy, i.e. they must implement measures to increase demand for local products; the most important of these measures is the increase of public spending itself. This policy is known as the Keynesian policy of fighting the economic crisis. But in this case, in the case of the crisis that began in the 1970s, it was as if what was taken for granted was exactly the opposite: the former supporters of Keynesian economic policy suddenly advocated a pro-cyclical policy of cutting public spending, especially of social spending, and of reducing demand, while governments did their best to apply an "austerity" policy, as it became known [1].

The reasons they evoked for applying such a pro-cyclical policy were the following:

(a) inflation

(b) the deficit in the balance between income and expenditure in the Public sector, and

(c) the deficit in the balance of external payments.

They argue, consequently, that not only is the deficit of the account of income and expenditure in the Public sector growing, but that it thus triggers the increase of Public Debt, and therefore of the interest the state has to pay; and thus, that the funding of the deficit through loans contracted by the state increases the demand for money and therefore interest rates, hence impeding private investment because it makes funding it more expensive.

I have shown elsewhere that the state, irrespectively of the reasons it itself evokes, is compelled to apply a pro-cyclical policy in periods where both the labor force and capital are underemployed [2].  This fact means that the conception of Keynesian economic policy, which allegedly[3] was applied until the beginning in the 1970s, was based on delusions.

According to the Keynesian conception, the state must apply an anti-cyclical stabilizing policy, i.e., it must implement measures to increase demand, when this is lower than supply, and must take measures of decreasing demand when it is higher than supply. This of course presupposes that the state is in the position of applying such a policy -- a presupposition that the Keynesian conception of economic policy simply takes for granted.

But the conviction that the state's capacity to apply an anti-cyclical policy is a given is based on a delusion. It is based on the delusion that the capacity and ability of the state to shape the economic conjuncture in the desirable direction is always, and independently of the economic conjuncture itself, a given. The delusion, in other words, is that the economic crisis does damage the economy but does not damage state finances, nor the ability of the state to implement the appropriate (according to the Keynesian view) anti-crisis measures.  [...]

Yet the present crisis has shown that the Public sector is by no means a water-tight sphere and that the economic crisis makes no exception for it, but is also a crisis of state finances and consequently of the ability of the state to implement measures for its overcoming.

But if the ability of the state to implement measures against the crisis is questioned, then the following questions arise:

Why do governments not only take this ability for granted, but also propagate every economic policy measure they implement as a measure for the overcoming of the crisis?

Given the fact that their ability to implement measures to overcome the crisis is in fact questionable, then what is the real purpose of these measures that governments advocate as measures contributing to overcoming the crisis?

Finally, what are governments really saying when they speak of "overcoming the crisis"?

To examine the question of what overcoming the crisis means, we must insist for a while on the question: what does the crisis consist in?

As I already mentioned, it consists principally in two things: unemployment and the underemployment of already invested capital.

What unemployment means for wage labor is well known: it means poverty and often immiseration for those who have already lost their jobs, low wages, intensification of labor, increased labor discipline, restriction of their trade unionist and demands-based activity and fear of the possible loss of a job for those who still have one.

But what does the underemployment of capital mean for capitalists?

Let's assume that a capitalist owns ten machines, worth 500 million drachmas, with which he can produce, within a given period, let's say in one year, 1,000 units of a product which costs 50 million and is worth 100 million. If the demand for his product is equal to 1,000 units in a period, then he will produce and sell 1,000 units in the period, that is to say, he will produce and sell as much as he can produce with these specific machines. In this case, the degree of employment of his capital is equal to 100%, his profit is 50 million and his profit rate is 10%. But if demand for his product, and therefore production, is reduced to 800 units in a period, then the degree of capital employment decreases to 80%. Let's assume that in this case, both his cost and his income from sales decreases by the same percent by which demand and production decreased. Then his profit will shrink to 40 million and his profit rate to 8%. A reduced rate of the employment of capital thus means a decrease of the profit rate.

I will refer later to some other, not less interesting, aspects of the crisis. For now, let us stick to the two I have just mentioned. So, what can the state do to overcome unemployment and the underemployment of capital?

Before I answer this question, I want to remind you of the following: at least since 1936, when Keynes' General Theory was published,  we know that it is possible to have a coexistence of a balance in the market of goods, and thus a full employment of capital, and of an imbalance in the labor market, i.e, underemployment of the labor force (unemployment).  In fact it tends to be a rule that the balance in the commodity market and the full employment of capital do not coincide with a balance in the labor market, i.e, with a full employment of the labor force. For there is no reason whatsoever why the full employment of capital would necessarily entail full employment for labor.

This means that not only is the crisis a different thing for wage labor than it is for capitalists, but also that its overcoming is a different thing for wage labor than it is for capitalists. Consequently, there is no such thing as "the crisis" generally; there is the crisis for capitalists, i.e., the underemployment of capital and its consequences (falling of the profit rate and possibly of profits as well), and there is the crisis for wage laborers, i.e., unemployment, low wages, etc.

Governments usually speak of the crisis as such, while the measures they take only relate to the rate of the employment of capital and the blunting of the consequences of the low rate of capital employment on the profit rate and on profits. These measures (decrease of public, and especially of social spending, wage cuts, etc.), intensify the crisis and its consequences for wage laborers.

While unemployment, as long as it doesn't lead to social upheaval, is at least indifferent as an issue for capitalists and to a large extent indifferent to governments as well, the overcoming of the low rate of capital employment and of its consequences for capitalists is something for which governments and capitalists alike ask wage laborers to help with, arguing that the crisis is a single issue for everyone and that therefore everyone must work to overcome it: wage laborers must help by working more intensely and being content with less, the state by funding production, privileging investment and reducing taxes on profit, and capitalists must also help by cutting wages, increasing profits and waiting for the right moment to invest.