Tess L

"We start 2009 in the midst of a crisis unlike any we have seen in our lifetime - a crisis that has only deepened over the past few weeks. ... If nothing is done, this recession could linger for years. In short, a bad situation could become dramatically worse."

In this speech to state governors and mayors in early January, Barack Obama was not exaggerating. In 2008 more American jobs were lost than at any time since World War II - the figure is nearly 2 million and rising daily. Millions have lost their homes and shanty towns mushroom on the fringes of the big cities as the ranks of the homeless continue to swell. Many financial institutions have closed their doors, and manufacturing is at a 28-year low, with businesses large and small going to the wall.
Made before his inauguration (such a departure from tradition underlining the gravity of the crisis), Obama's speech was designed to push the incoming Congress to accept his stimulus package. He plans to spend an ever-increasing sum - $US800 billion at time of writing, but it could well go higher - in an attempt to revive the US economy, and warns that unemployment could soar past 10 per cent if his spending program is rejected.
Obama appealed to Democrats and Republicans alike to "put good ideas ahead of the old ideological battles" and support his program.
But what are Obama's "good ideas"? Do they really represent an ideological alternative to the disaster that this crisis of capitalism has unleashed on the working class in the US and around the world? And can they work? To answer these questions, we need to review some economic history.
Every time capitalism gets into serious trouble, those who run the world and their apologists thrash around for solutions. The monetarist Milton Friedman was regarded as a crank in the 1960s. But following the onset of world recession in 1974, his ideas found an audience and were widely taken up. Friedman won a Nobel Prize and was feted as a hero by world leaders.
For three decades, the ideology of the market and neoliberalism reigned supreme, as conservative and social-democratic governments alike slashed spending, privatised and deregulated anything that moved and introduced austerity programs to drive down workers' living standards. This was supposed to restore profitability - which it did, up to a point, and to reward workers for their sacrifices as the wealth "trickled down" to create jobs - which it didn't. Instead unemployment remained high in many countries and there was a huge transfer of wealth from poor to rich.
Now, with capitalism plunging into another crisis, its worst since the Great Depression of the 1930s, the pendulum has swung again. Now it's neoliberalism that's discredited and Keynesianism that's being touted as the panacea.

Keynesianism

Obama's stimulus package includes such measures as major infrastructure projects, job creation programs and tax cuts for the less well-off. This is sometimes called "pump-priming" the economy - to get it going again by giving capitalists the confidence to invest and create jobs and ensuring that workers are well-off enough to maintain demand for commodities.
Such programs fall under the umbrella of Keynesianism - named after John Maynard Keynes, one of the most prominent bourgeois economists of the twentieth century. Developed largely in response to the crisis of the 1930s, Keynesianism displaced laissez-faire capitalism (which has much in common with neoliberalism) as the dominant economic orthodoxy in the Western world until the 1970s.
Keynes came from a privileged and wealthy background; he was educated at Eton and became an academic at Cambridge University. In the 1920s, he acquired a reputation as a radical with his critique of the economic establishment. But Keynes was no anti-capitalist; he boasted that he had never read Marx. Rather his purpose was to save capitalism from its own destructive tendencies and make it work. He was a key player in the 1944 Bretton Woods conference that gave us the World Bank, the IMF and the WTO, and he was eventually made a peer for a lifetime of service to the British ruling class.
The publication in 1936 of Keynes's major work, the General Theory of Employment, Interest and Money, was very timely. It provided a theoretical underpinning for a process that was well underway in the world economy. The Depression had forced governments everywhere to intervene directly in economic life. In the US there was a major program of government spending under Roosevelt's New Deal.
Keynes argued that an economy based on money and the unregulated anarchy of the market was always liable to break down. When capitalists stopped investing, closures and sackings and a fall in production followed. Workers on the dole - or with no income at all - were often unable to afford even the bare necessities of life. So demand for all sorts of products slumped, leading to more closures and sackings in a vicious downward spiral.
For Keynes this underconsumption was key to the problem, and such crises could be avoided by governments intervening with the right policies. Like all bourgeois economists, he rejected Marx's argument that this type of crisis is both endemic and necessary to capitalism.
In a recession, some businesses go broke, giving other capitalists the opportunity to buy cheap assets. Mass unemployment allows employers to go on the offensive, cutting wages and conditions. Eventually investment gets going again, workers are employed, demand is stimulated. The more inefficient capitalists are weeded out and profit rates rise. The system is thus cleaned out, laying the basis for a boom.
But this is an anarchic process. As economic signs begin to improve, more capitalists rush to invest, competing for a share of the market. But because no planning goes into production, you soon get overproduction - not in terms of human needs, but because there are too many goods on the market to be profitably sold.
Meanwhile, because of the rise in demand, prices of raw materials start to climb, and workers have more confidence to demand higher wages. Overproduction sparks price wars as big firms try to drive their competitors out of business. Then some of those who've borrowed heavily to finance expansion go bankrupt and before you know it we're in recession again. This cycle is not just a theoretical construct, it has occurred with almost predictable regularity for most of capitalism's history (the exception is discussed below).
Like all bourgeois economists, Keynes never understood why fluctuations in the level of investment occurred. At one time, he blamed the operations of the financial markets, bankers and speculators for pushing up the rate of interest and thus cost of borrowing. But the Great Depression knocked that theory on the head. No matter how cheap money was, firms would not borrow to invest when faced with stagnant markets and no prospect of making a profit on their extra investment.
Another time he toyed with the ludicrous notion that the captains of industry periodically experience waves of optimism - leading to investment and a boom - or pessimism - leading to contraction and a slump.

The Marxist theory of crisis

Marx argued that capitalism goes into crisis because over time, there is a tendency for the rate of profit - the return that capitalists get on their investment - to fall.
Capitalism is a competitive system, with every firm trying to get the edge on its rivals. The capitalists need to be able to undercut their competitors' prices. To do that, they have to be able to produce more cheaply. Obviously they try to reduce costs wherever possible - mainly by keeping wages down. But major productivity gains only come from investment in technology. A machine that can churn out twice the number of goods with half the number of workers is going to deliver a competitive advantage.
The first to latch onto a new process will make a killing. But then others will be forced to invest in the same process in order to keep up. Before long, everyone has it and the competitive advantage is lost. What's more, industrial "state of the art" doesn't last long. Soon someone invents an even more efficient process, forcing everyone to retool and reorganise production.
Because of competition, prices have to be kept as low as possible, so they fail to keep up with the rising costs of investment in raw materials and machinery. And there's another, deeper problem. It's only labour that creates new value, so as the proportion of outlay on machinery increasingly outstrips investment in labour, downward pressure is exerted on the rate of profit. A firm may be making megabucks, but if the profits represent only a small return on their investment, the actual amount is irrelevant. Those with money to invest may be able to get a better return on property or share speculation, as we have seen in recent times. This is of course a useless, parasitic activity compared to producing goods that people actually need, but under capitalism it's profit that matters, not human need.
It's simple really: capitalists will invest when they think they'll get a good return, and not otherwise.
Because Keynes didn't understand that crisis is actually necessary to the system - to clear out the dead wood and restore profit levels - he thought it could be circumvented. When the economy started to slide into recession, Keynes said, governments should intervene, pumping money into the economy to push up demand. This would require deficit financing, but the extra spending would reflate the economy. Rising demand would encourage private capitalists to invest and take on more workers and a slump would be avoided.
There are however several problems with this. Firstly, inefficient capitalists are propped up, acting as a drain on the economy as a whole and putting pressure on profits. Secondly, deficit financing leads to unacceptable levels of government debt if they borrow, or to inflation if they just print money. There's also the danger that pushing up demand will suck in imports and cause problems with the balance of payments. Thirdly, governments can't actually force private capitalists to invest. In fact, big business is much more able to exert pressure on government than the other way round. And of course, no individual government can control the world economy, which is divided into competing national chunks. There is no world state which could regulate the system as a whole, so what any individual government can do on the domestic front is limited.
None of this was a problem during the long post-war boom of the 1950s and 1960s. The system was expanding and governments didn't need deficit financing. But while that unprecedented boom was underpinned by massive government spending, it was a very particular type of spending - arms production.
Though politically necessary, in economic terms arms are a complete waste. This was actually a good thing for capitalism during the post-war boom. Arms spending meant that vast amounts of capital were taken out of circulation, rather than piling up within the system. By diverting resources away from accumulation, arms spending slowed down the tendency of the rate of profit to fall.
No one actually intended this or worked it out as a theory. It was an accidental by-product of the Cold War, but it seemed to confirm the ability of Keynesian policies to avoid slumps.

The failure of Keynesianism

However, the effect of this "permanent arms economy" was temporary. It's estimated that between the mid-1960s and mid-1970s, profit rates in most countries fell by about half.
Then along came the 1974 recession, and governments automatically started pumping money into the economy. To their dismay, it didn't work. In fact, things got worse with the appearance of a phenomenon that wasn't supposed to be possible: stagflation, i.e. stagnation (lack of investment and economic growth), accompanied by rampant inflation.
With inflation and debt going through the roof, governments of all persuasions turned to monetarism: spending programs were slashed and industrial production in the West fell by about 13 per cent. We were back on the boom-slump rollercoaster with a vengeance. The Keynesian mantra of government spending gave way to the neoliberal mantra of government spending cuts.
But despite the apparent differences in the two approaches, they have a common purpose.
Socialists welcome increased government spending on health, education, social welfare, public transport and so on. But this is because we are for raising working class living standards, not because it's a way of fixing the economy. Similarly, when we support nationalisation of industry and government regulation, it's because privatisation and deregulation usually lead to cuts in jobs and services, attacks on unions and so on. Moreover, struggles around these issues can build workers' confidence to challenge the system's priorities more fundamentally.
Keynesians are coming from a different perspective. To the extent that they appear pro-worker, it's because impoverished workers are unable to consume enough to stimulate investment and keep the system healthy. They are also acutely aware of the potential for resistance if the working class refuses to make the sacrifices demanded of them. Keynes himself defended his policies as "the only practicable means of avoiding the destruction of existing economic forms in their entirety."
Keynesianism often gets the credit for ending the Great Depression, but this is a myth. It was the preparations for war that were most important factor in reviving investment, and the destruction of huge swathes of capital during the Depression that laid the basis for the long boom that followed the war.
It is too early to predict how effective Keynesian measures will be in the current crisis. But workers shouldn't be too optimistic.
Barack Obama has handpicked former champions of neoliberalism - such as Paul Volcker, former head of the Federal Reserve - to oversee the US economy. The fact that these people are now equally vociferously singing the praises of Keynes tells us a lot. Last year's massive bailouts of banks and businesses indicate where their priorities lie. And for all the gloom, they see a longer-term benefit in using state spending (i.e. workers' taxes) to lay the groundwork for reindustrialisation, giving US capitalism an opportunity to reclaim its dominant position in the world economy.
We live in a world divided into competing economic blocs and competing interests, therefore by definition a world in which a co-ordinated and co-operative approach to economic crisis is impossible. Keynesianism isn't an alternative to neoliberalism; it's just a different strategy for attempting to deal with capitalism's problems. For workers, the problem is capitalism itself.