Why didn’t capitalism collapse in 1929? (Part three)
Continued from here
If anybody thought that the magnates of industry and finance were going to lie down and play dead simply because some obsessive, detail oriented, incredibly well read, old fart from Germany offered evidence that their future was bleak … well, Matt Taibbi has two words for you: Goldman Sachs.
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.
It would be nice to be able to follow that particular rabbit down its hole, but we are concerned not so much with the historical record of how this most rapacious and predatory form of capital came to dominate your life, but the theoretical model which predicted that it would.
If Grossman is correct, Marx detailed four steps businesses would take in the event of any collapse to restore the economic activity, i.e., to turn a breakdown into a temporary downturn:
- Slow down the rate of investment in new machinery, plant, and equipment, raw materials and inventory
- Devalue the existing machinery, plant, and equipment, raw materials and inventory
- Reduce employee wages
- Foreign expansion
It can be argued by critics of this theory of collapse – and many have made this argument – that the performance of the American economy coming out of the Great Depression, and, in particular, following World War II, proved much of Marx’s theory wrong. In the end, capitalism did not collapse despite improvements in the productivity of labor – it proved resilient and ultimately rebounded from a near cataclysm.
But, those critics would have to explain this quote from Lord John Maynard Keynes:
Thus it is fortunate that the workers … resist reductions of money-wages … whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.
If we are interpreting this passage correctly, Lord Keynes seems to be saying that you are so dumb that as long of you have a job you will not complain that your real standard of living is falling as a result of inflation – provided that drop is achieved gradually and continuously. If the amount of dollars written on your paycheck stays the same, or even increases, you can be incrementally impoverished through inflation without any significant complaint on your part.
What is more, Keynes observes, inflation not only serves to reduce real wages, it can also reduce real salaries, rents, and interest on debt.
Thus Keynes stumbles on a way to do much of what Marx said had to be done – slow the rate of investment in new plant and equipment, devalue the existing stock of plant and equipment, and reduce wages – in a fairly novel way: by progressively and gradually depreciating the purchasing power of the currency. Inflation became a permanent fixture of the American economy.
The question to ask, however, is: Did the policies advocated by Keynes cause the recovery of the economy in the aftermath of the Great Crash of 1929?
This is not a difficult problem for economists to solve. It is fairly easy to build a Keynesian model of the economy in the 1930s, put in the changes imposed on the economy by the New Deal and the Federal Reserve, and measure the effects of those changes on economic activity.
Better yet, there is a wealth of economic data at hand which can be, and have been, sifted innumerable times to discover the answer to that question.
In the badly split field of economics, the results of those studies seem to have one common point of agreement – total hours of work remained well below its peak level until the outbreak of World War II:
Hours worked per adult–including government workers–fell about 27% between 1929 and 1933, and in 1939 remained about 22% below the 1929 level. Many people, including economists, are surprised when they read that there was little recovery in hours worked during the New Deal, because the unemployment rate declined, and typically declines in unemployment go hand-in-hand with higher labor [hours]. But changes in the unemployment rate don’t provide a good proxy for changes in labor [hours] during the New Deal because some New Deal programs included explicit work-sharing. By reducing the average workweek, the New Deal was able to spread employment across workers, but this doesn’t mean there was an increase in the amount of work that was done.
Hours of work never recovered! Capital had reduced those average hours approximately along the lines proposed by the Black-Connery legislation, which mandated a reduced thirty hour work week.
And, if hours of work did not return to peak levels it is obvious capital had suffered precisely the kind of final breakdown predicted by Marx’s theory.
Moreover, unemployment, although below the peak levels earlier in the decade, still was above 15 percent in 1940, despite a large-scale government make-work program.
James K. Galbraith inadvertently points out that much of this “recovery” was an illusion built on Washington debt financed spending:
Roosevelt ran (in 1936) on a platform that he would try to reduce significantly, if not completely eliminate, the deficit in the 1937 fiscal budget — and he sent to Congress a budget that did just that. Roosevelt won by a landslide — but the economy fell like a landslide and in the first 9 month of 1937 the economy fell back to approximately where it was in 1932. In other words “fiscal responsibility” in just 9 months led to a landslide fall in the economy back to where it was near the bottom of the Great Depression . 9 months of fiscal responsibility had undone the good work of 4 years of deficits.
No doubt, this debt was a windfall for investment bankers like Goldman Sachs, who could afford to buy the bonds issued by Washington, and then sit back and watch their otherwise superfluous funds appreciate on the public dime. But, it served no purpose for the millions of working families who were still facing a generational economic catastrophe.
Which leaves Marx’s fourth point – foreign expansion:
Well, there was this rather ugly dust up that cost 82 million lives, left the United States as the only functioning industrial power on the planet, and its currency as the world’s reserve money…
To be continued