“Life is so boring there is nothing to do except spend all our wages on the latest skirt or shirt. Brothers and sisters, what are your real desires? Sit in the drugstore, look distant, empty, bored, drinking some tasteless coffee? Or perhaps BLOW IT UP OR BURN IT DOWN.”
– The Angry Brigade
1) Contradiction of capitalism: there is a tendency for the rate of profit to fall over time, and so for the rate of economic expansion to slow down, since the rate of expansion is determined by the surplus available for investment in the means of production. Eventually wages will not rise, rent on land will become stable, and the engine of capitalist expansion – profits – would become zero. The classical economists called this the stationary state.
2) State solution: finance all periods where the rate of profit decreases with financial stimulus, in perpetuity, via discretionary monetary and fiscal policy.
Look around you. There is, simultaneously, a shortage of saving to finance the increased investment and an excess of consumption goods expenditure relative to the supply of consumption goods available. Is that not a monstrous problem? The appearance of excess demand in the consumption goods sector has caused prices to rise and the requisite saving forced out of consumer’s incomes.
Relative prices now change in favor of consumption goods, and factors (labor, capital) are attracted back to meet the increased demand for output, swollen by the expansion of incomes in the longer processes. But because capital and labor are not perfectly malleable and substitutable this cannot be accomplished immediately and projects in the longer, more roundabout processes have to be abandoned. Construction stops. The cranes sit empty all around the world.
John Maynard Keynes masterminded the solution (2) to the contradiction (1) which David Ricardo had discovered. Unfortunately for Keynes and his modern-day followers (i.e. every government economist), the contradiction runs much deeper than this. Even with constant stimulation through investment, and hence inflation, the increases in investment through Keynesian-type policies are not justified by the existing demand. This is an inherently inflationary worldview, one that constantly needs its wheels greased to keep moving.
Keynes was famous for saying, “In the long run we’re all dead”.
We have been warned. Here is the warning: if we don’t act now, the forces of capitalism will take so long to equilibrate that we will starve today. If you interpret his maxim another way, however, it is actually more like a prophecy. If we follow Keynesian relief policies, even in times relative stability, in the long run we will be completely exhausted, if not dead.
As relative prices fall for the longer processes, investment slows, the money supply “tightens”, and what follows is a phase of contraction and unemployment as capital losses are incurred and workers are laid off. Because the problem was caused by an artificially induced, incorrect structure of relative prices and production periods, it can only be solved by a readjustment of relative prices and not by a change in the absolute price level. Hence, any attempt by government to reduce the unemployment by discretionary monetary policy will only lead, like a great big bubble, to further dislocation, inflation, and unemployment.
But is this not the policy of many Western governments already, especially the United States’? After all, years of debt accumulation, $11 trillion, will need to be repaid by the working classes of the future. Yet each year the national debt becomes larger and larger. The excuse the government economist give is that the working class “inherits” the assets that the earlier governments purchased. Assets? You mean like gunpowder and F-14s?
Any time the government finds itself in a pinch, it borrows against the future working classes. Moreover, as expectations begin to take account of inflation, monetary expansion will be required to an increasing scale as inflation must accelerate to maintain any given level of employment. This can only mean the problem will get much worse.
Short term benefits, with damaging long term consequences. If this is not the prevailing economic ideology of the late 20th and early 21st Century, I am not sure what is.