The US economy, recession, Marx and Keynes

Gerard Jackson
BrookesNews.Com
Monday 17 November 2003

The upturn in the US economy has certainly disinterred some economic verities. It also got me thinking about economic absurdities. In May 2001 many commentators were still arguing that because real wages were still rising the boom would continue, even though productivity and profits were falling.

While these commentators were pushing their economic fallacies I was arguing that a situation of rising wages, falling productivity and profits indicates that an economy has entered the final phase of the boom. And so it was with the US economy. That so many economic commentators are still confused or just plain errant on this point is not surprising when we consider that when Keynesianism swept through the universities it did so by casting aside the wisdom of the classical economists, something that even Keynes warned against.

As he said in 1946: "I find myself moved, not for the first time to remind contemporary economists that the classical teachings embodied some permanent truths of great significance, which we are liable to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past."

In other words, don't throw out the baby with the water. Belated advice if ever there ever was any. Moreover, his view of equilibrium forces as mysterious "undercurrents" demonstrates that he never grasped the nature of the market as a process. That Keynes warned his disciples about going to far brings us to Karl Marx, consumption and economic advice that largely consists of telling the Fed to maintain consumer spending.

Regardless of what many seem to think, Marx was basically a warmed up Ricardian and his economics did not really deviate that much from the Ricardian orthodoxy. And so when faced with the question of the business cycle his view was in keeping with those of most of his contemporaries. So if he were alive today and someone were to argue with him that consumption is needed to maintain output he would have replied, as he did:

"It is purely a tautology to say that crises are caused by the scarcity of solvent consumers, or of a paying consumption. . . . If any commodities are unsaleable, it means that no solvent purchasers have been found for them. . . . But if one were to attempt to clothe this tautology with a semblance of a profounder justification by saying that the working class receive too small a portion of their own product, and the evil would be remedied by giving them a larger share of it, or raising their wages, we should reply that crises are precisely always preceded by a period in which wages rise generally (italics added) and the working class actually get a larger share of the annual product intended for consumption. From the point of view of the advocates of simple(!) common sense, such a period would rather remove a crisis."

(I should add that Marx was perfectly capable of changing his economic stance if it allowed him to successfully browbeat an opponent).

There are two things to note from this passage. The first, as I have already pointed out, is that Marx was echoing the view of the classical school in general, including Malthus. The second point cannot be derived directly from the passage but is a very important one, and that is that the passage also fits in with Austrian thinking.

Some readers are familiar with the Austrian school's concept of malinvestments. Once recession bites clusters of malinvestments appear in the higher stages of production. The classical economists observed the same phenomenon for which they invented the term "disproportionality".

Although Ricardo's monetary explanation of recessions is excellent as far as it goes, it still could not explain the sudden appearance of malinvestments. The world had to wait for the birth of the Austrian school before the puzzle could be solved.

We can thank Keynes and his disciples for the wisdom of the classical school being ejected from universities. We can also thank the Austrians for rescuing and keeping alive what was valid in classical thinking but almost lost.

Gerard Jackson is Brookes' Economics Editor