Paul Burkett. Review of Social Economy. Volume 52, Issue 1, Spring 1994.
Mainstream thinking lacks historical memory regarding the meaning of the Great Depression and the lessons that can be derived from that period. The dominance of supply-side ideology and the failure to face a socially-rational response to the economic crisis indicates an almost-complete vacuum of historically informed far-sightedness in the ruling class, orthodox economists and policymakers. The main initiative toward meaningful measures that deal with the economic crisis in the US should come from a new upsurge of the working class.
I. Introduction
With the recent recession and weak “recovery” of the U.S. economy, mainstream economics and policy have reached a state of bankruptcy and confusion unparalleled since the early-1930s. Working-class living standards have been in decline for a decade and a half, yet business leaders and policymakers continue to call for “sacrifice” and “competitiveness” as the way out of the long-run malaise. Rather than bringing a peace dividend, the end of the Cold War poses the threat of an even worse unemployment crisis, as U.S capitalism appears unable to redeploy resources from destructive to constructive uses. Meanwhile the ecological crisis continues to unfold, the medical, education, and transportation systems deteriorate, and unemployment of workers and productive capacity grows while the employed work harder and longer to sustain ecologically and socially irrational modes of private consumption. Hundreds of billions of dollars are spent on high-tech weaponry, financial speculation, advertising, and other unproductive activities in the cultural wasteland of U.S. capitalism, yet we are told that we cannot afford the minimum of socialized health care, vacation times, and public transportation systems available in other advanced capitalist countries. In this context a Democratic president, while dancing to the tunes of Wall Street, the corporate media and the military-industrial complex, claims as his main policy success the refinancing of mortgages by the “middle class.”
How did this situation come about, over 50 years after the Keynesian revolution? The suggestion here is that mainstream economics and policy are unable to come to grips with the basic causes of our current socio-economic problems because of a lack of historical memory. The questions raised by Keynes and other economists in the 1930s led to a debate over the possibility of long-run stagnation in the mature capitalist economy. But this stagnation debate, far from being further developed and applied, was forgotten or consciously abandoned as Keynes’ analysis was vitiated and submerged under the “Neoclassical-Keynesian synthesis” during the long post-World War II boom of the global capitalist economy. The issues raised in the 1930s, concerning the ultimate goals of economic activity, were shunted aside in favor of a technocratic Keynesianism operating in the service of corporate capital and the military-industrial complex. Since Neoclassical-Keynesian economics had no connection with the earlier stagnation debate, it was ill-equipped to confront the subsequent crisis and resurgence of fundamentalist Neoclassical perspectives (Supply-Side economics and the New Classical school) without resorting to pre-Keynesian explanations of crisis-phenomena like involuntary unemployment.
Sections II and III survey the stagnation debate of the 1930s and the mainstream abandonment of long-run stagnation issues during and after World War II. Section IV illustrates the historical vacuum in current economic theory via a critical review of Peter Temin’s recent book, Lessons from the Great Depression (Temin, 1990). The historical default of mainstream theory and policy is then contrasted with one major tradition that has consistently built upon and developed the historical-systemic questions debated in the 1930s: the Neo-Marxian theory of overaccumulation and stagnation. Section V introduces this alternative perspective and applies it to the inter-war era and the current conjuncture. The political questions raised by the analysis are addressed in Section VI.
II. Economic Theory and the Great Depression: The Great Stagnation Debate
At the onset of the Depression the dominant view among mainstream economists in the U.S. was that the initial downturn of investment and output was a more-or-less normal cyclical phenomenon and that recovery would inevitably follow. Economists disagreed about the proper monetary, wage and price policies for facilitating recovery; but the idea that this recovery might fail to lower unemployment below catastrophically-high levels did not initially enter the heads of mainstream economists. The Depression and associated policy issues were initially viewed in short-run cyclical context rather than as connoting any long-run barrier to a full recovery of investment (Stoneman, 1979, ch. 2-3).
As the economy collapsed and the decade wore on without approaching a full recovery, “the focus of economic interpretation inevitably moved away from the analysis of the boom and bust of 1921-1933 and toward the specific problems of the 1930’s, viewed as a new age of depression” (Stoneman, 1979, p. 99). This first involved eclectic analyses speculating that the severity of the downturn might have been due to the previously undetected seriousness of financial and sectoral imbalances built-up during the 1920s boom. Some such analyses implied that for a full recovery to occur in the near future, the state might “have to arrogate large new functions in support of economic balance” (Stoneman, 1979, p. 53).(1) However as long as the weak recovery that began in 1933 continued, and the prior focus of theory on short-run cyclical fluctuations around a full-employment growth path was not fundamentally questioned, the prospects for a real revolution in theory and policy were quite dim. It was in the years 1936-38 that two events combined to shake up and recast the whole debate within mainstream macroeconomics: Keynes’ General Theory and the renewed economic collapse of 1937-38.
In the General Theory Keynes rejected the heretofore dominant notion that the rate of interest has an automatic tendency to equilibrate savings and investment at full-employment. Savings and investment are determined by different economic forces: the former primarily by income and its distribution, the latter primarily by expectations as embodied in the marginal efficiency of capital. The rate of interest is determined in the market for liquid assets rather than by saving relative to planned investment. The main independence variable here is planned investment: if this is less than saving at full-employment, then saving will be equilibrated with investment via a reduction of output to below the full-employment level. Involuntary unemployment cannot be removed via an all-around reduction of money wages—even supposing that workers are totally unresistant to money wage cuts and that prices move in proportion to keep real wages constant—since such a generalized deflation leaves the gap between income and consumption at full employment unchanged (Keynes, 1964, p. 261). Moreover, the high demand for liquidity and the lax state of profit expectations during a depression imply that expansionary monetary policy may not be sufficient to ensure a recovery to full employment (Keynes, 1964, pp. 143, 158, 173). Hence it is possible that “a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment” (Keynes, 1964, p. 378).
Keynes expressed his analysis m terms of a short-run equilibrium model of a competitive capitalist economy, which was crucial because given the dominant orthodoxy, “until Keynes had made his system in traditional short-term equilibrium form, economists … could not pursue any of the key possibilities it synthesized” (Stoneman, 1979, p. 116). Indeed, in the General Theory “it simply was not assumed that depression tended to be followed by full revival and repetition of the cyclical process” (Stoneman, 1979. p. 100). This created a legitimate opening for those concerned with possible long-run shortfalls of investment relative to the full-employment level of savings, i.e., with the possibility that the Depression might signify a secular trend toward overaccumulation of savings relative to profitable investment outlets (Stoneman, 1979, p. 100). Alvin Hansen took advantage of this opening to develop a theory of secular stagnation which emphasized the long-run historical factors operating against “a volume of investment expenditures adequate to fill the gap between consumption expenditures and that level of income which could be achieved were all the factors employed” (1939, p. 371). Among these were declining population growth, diminishing opportunities for “the opening of new territory” in the continental U.S., and capital-saving innovations (Hansen, 1939, p. 377). These phenomena created a “problem of inadequate investment outlets” in the absence of “new industries” like the railroad or the automobile which were capable of initiating “a powerful upward surge of investment activity.” Even the emergence of such a “great new industry” could not permanently solve the problem since once such a new industry “reaches maturity and ceases to grow, as all industries finally must, the whole economy must experience a profound stagnation, unless indeed new developments take its place” (Hansen, 1939, p. 379).
This theory was initially quite attractive to many U.S. economists, and not only because it derived legitimacy from the General Theory. Hansen’s analysis integrated the historical and technological concerns of the Institutionalist school, including prior work on the accelerator mechanism by J. M. Clark (Stoneman, 1979, pp. 130-35). In particular, Hansen argued that the accelerator dominated investment in the 1930s precisely because of the secular stagnation of autonomous investment, which caused investment to be “geared rigorously and narrowly … to the immediate requirements of consumption” (1938, p. 278). Hence the post-1933 recovery was cut short in 1937-38 when consumption ceased to rise. The 1937-38 downturn of the U.S. economy firmly established Hansen’s “pre-eminence as America’s interpreter of Keynes and of the Depression” (Stoneman, 1979, p. 122). Although Hansen (1938, p. 282) recognized that the aborting of the weak 1933-37 recovery was at least partly due to contractionary government policies, the main lesson drawn was
that investment was insufficient under current conditions. And not by reason of institutionally imposed distortions of the classical system of price-wage adjustment, but due to deeper, more autonomous factors affecting the whole nature of investment. Keynes and then Hansen had finally freed themselves of the orthodox, and even neo-orthodox and cycle-oriented, doctrine that outlets for investment were assured (Stoneman, 1979, p. 117).
How could it be otherwise? The recovery had not approached full employment, and during 1937-38 unemployment rose from 14.3 percent to 19.0 percent while capacity utilization fell by more than one-fourth (U.S. Bureau of the Census, 1975, p. 135; Foster, 1984, p. 205). Manufacturing production (1923-25=100) declined from 121 in December, 1936 to 73 in May, 1938—and still stood at 97 as of June, 1939 (Board of Governors, 1936-39). For many economists and policymakers, the issue was no longer whether a massive, ongoing government stimulus was needed, but whether such stimulus was in contradiction with the existing institutions of capitalism and representative democracy and if so what could be done about it. The robust expansions that were going on in Germany and the U.S.S.R. encouraged this link-up between the problem of long-run barriers to investment and more basic, systemic questions:
Various measures have been offered to maintain full employment in the absence of an adequate rate of technological progress and of the development of new industries … Public investment may usefully be made in human and natural resources and in consumers’ capital goods of a collective character designed to serve the physical, recreational and cultural needs of the community as a whole. But we cannot afford to be blind to the unmistakable fact that a solution along these lines raises serious problems of economic workability and political administration … How far such a program, whether financed by taxation or by borrowing, can be carried out without adversely affecting the system of free enterprise is a problem with which economists, I predict, will have to wrestle in the future far more intensely than in the past … Thus a challenge is presented to all those countries which have not as yet submitted to the yoke of political dictatorship (Hunsen, 1939, pp. 381-382).
In short, the problem of long-term investment insufficiency naturally created a concern with the workability of capitalism under the policies required to maintain full employment, which in turn raised questions regarding the goals of investment and economic activity as such. The aborting of the weak recovery in 1937-38, and the highly-charged issues which it raised, also caused those who disagreed with Hansen’s theory to reorient their analyses toward historical-systemic questions. Schumpeter, for example, had earlier blamed the seriousness of the Depression on “non-economic” barriers to creative destruction and recovery, such as “impediments to the working of the gold standard, economic nationalism heaping maladjustment upon maladjustment, a fiscal policy incompatible with the smooth running of industry and trade, a mistaken wage policy, political pressure on the rate of interest, organized resistance to necessary adjustment and the like” (1934, p. 15). Now Schumpeter (1939, ch. 15) ascribed the Depression to a synchronization of the troughs of three economic cycles: the normal short-run business cycle (Juglar), the shorter-term inventory cycle (Kitchin), and the epoch-spanning Kondatrieff-long-wave cycle. To explain the failure of the recovery Schumpeter appealed to the disruptive effects of the New Deal and the anti-big business atmosphere of the 1930s on capitalist’s state of long-term confidence (1939, pp. 1038-50). Thus, even though Schumpeter rejected the Keynes-Hansen approach, his own response raised profound historical questions that underlie his later explicit denial of the long-run viability of capitalism as we know it (Schumpeter, 1950). Certainly Schumpeter’s conception of catastrophic downturns like the Depression as “fundamentally normal and precedented reaction[s] to far-reaching capitalist innovation and progress” was quite disturbing (Stoneman, 1979, p. 157). The same goes for the hypothesis that the 1930s stagnation crisis was due to a “hostile social atmosphere” which “capitalism [had] produce[d] by its mere working” (Schumpeter, 1939, p. 1038).
Overall, then, the dominant factor conditioning the development mainstream economic thinking in the 1930s was the failure of private investment to move close to the full-employment level. In the wake the 1937-38 downturn FDR “appointed a high-level Temporary National Economic Committee [TNEC] to find out what went wrong and what could be done about it” (Sweezy, 1987, p. 32). It seemed that mainstream economics and policy were about to directly confront and grapple with the fundamental “long-run historical dilemma advanced capitalist reproduction” (Foster, 1983, p. 178).
III. The End of the Stagnation Debate and the Two Neoclassical Counter-Revolutions
In evaluating why the stagnation debate of the 1930s came to an end, one may distinguish primary from secondary factors. As per the latter, Hansen’s adoption of Keynes’ theoretical revolution was not complete, as he continued to assert that high and rigid wages were inhibiting investment and technological progress (Hansen, 1939, p. 380). This tended to legitimize those economists who were directly opposed to Keynes’ theoretical revolution and who were still blaming high unemployment on workers’ wage demands (Stoneman, 1979, pp. 138-50). Such obsolete approaches gained additional sustenance from the conservative reaction against both the New Deal and the upsurge of labor militancy beginning in the mid-1930s. In this environment, the 1937-38 recession threatened the political life of the FDR administration, which thus became primarily concerned with the short-term measures needed to assure a quick cyclical recovery (Stoneman, 1979, pp. 168-69). As noted by May (1981, p. 128), this involved a retreat of the New Deal from structural reforms toward aggregate spending stimulus with less regard for the “social needs any desired expenditures should be applied towards.” The administration also began to re-embrace free-market ideology in the form of anti-monopoly thinking pure and simple, and despite Hansen’s (1940) cogent testimony the TNEC focused on the mere documentation of monopolistic concentration of economic power rather than the basic questions posed by the Depression for the mature capitalist economy (Lynch, 1946; Mitchell, 1975, pp. 361-65; Lekachman, 1969).
However, the primary factor that clinched the preempting of the stagnation debate was World War II. With the movement toward full-scale war economy in 1939, conservative opposition to the massive government purchases required to resuscitate the U.S. economy quickly evaporated—and the contradiction between the TNEC’s anti-monopoly pronouncements and the enhanced concentration of economic power connected with military-corporate contracts was scarcely noticed (Mitchell, 1975, pp. 47-54, 363-65). The war increasingly precluded any talk of long-run stagnation and associated structural issues, and by 1941 both the mainstream media and the TNEC’s final, anti-climactic report were sternly rejecting Hansen’s stagnation hypothesis as “un-American and unrealistic” even though “there [is] nothing in the [TNEC] record which challenges or refutes … Dr. Hansen’s ideas” (Lynch, 1946, p. 348).
There was some renewed debate over stagnation at the end of the war and during the 1948-50 recession when unemployment rose to 7.2 percent (Stoneman, 1979, pp. 175-81; Du Boff, 1989, pp. 95-96). But this was quickly submerged as unprecedented peacetime military outlays, the reconstruction of Europe and Japan, and the undisputed global hegemony of the U.S. combined to support a long-run expansion that temporarily overcame the problem of insufficient investment outlets. Although signs of long-run stagnation could be detected in the 1950s and 1960s—especially when the expansionary effects of defense and other government outlays were accounted for (Hansen, 1964, ch. 2; Vatter and Walker, 1990, ch. 6)—the growth of housing, automobile, and other durables consumption associated with the rapid expansion of “middle-class” suburbia created an atmosphere of long-run prosperity among mainstream economists, policymakers, and indeed much of the working-class.
In this setting, Keynes’ revolution was reduced to a set of technocratic policy prescriptions for counteracting the short-run business cycle. On the theoretical level, Keynes’ expression of his analysis in short-run equilibrium form facilitated its submergence under the “Neoclassical-Keynesian synthesis.” This framework combined Hicks’ (1937) static IS/LM interpretation of Keynes’ analysis of effective demand and the money market with a Pre-Keynesian treatment of the labor market and aggregate goods supply (Modigliani, 1944). The synthesis model did not fundamentally question the principle that wage and price flexibility can maintain full employment (see Weeks, 1989). If there was an excess supply of goods at full employment, then in the absence of rigidities the price level and money wages would fall. While falling money wages maintained full employment on the supply-side, the falling price level would increase the real money supply—causing the rate of interest to decline and stimulating investment expenditure back to the full-employment level. Relative to Keynes and Hansen, the synthesis placed more weight on the rate of interest as a determinant of investment—treating the possibility that investment might not respond to a lower interest rate as a “special case.” This model encouraged a focus on the “fine tuning” of fiscal and monetary policies to offset short-run investment fluctuations in an environment of exogenously-given wage and price rigidities.
However, practical-material conditions again provided the main basis for the emergent mainstream consensus. The availability of counter-cyclical expenditures gave rise to a purely technocratic type of Keynesianism which merely substituted the government-expenditure pump for the autonomous private investment that was lacking in practice. With a few honorable exceptions, there was little critical concern among elite mainstream economists and policy advisors for the collective rationality of the patterns of social development connected with government outlays (Du Boff and Herman, 1972; Stoneman, 1979, pp. 204ff).(4) The issues posed by the 1930s stagnation debate regarding the content, and the individual and collective purposes, of economic activity were forgotten. In this connection, Du Boff (1989, p. 118) suggests that the U.S. government chose military Keynesianism because it “possesses highly functional characteristics for American capitalism,” and that
military spending broke down the barriers to an expansion of government just when the dilemma for postwar U.S. capitalism was acute. The recession of 1948-49 was raising, once again, the fundamental question of the 1930s—whether private investment could be relied upon to provide steady economic growth with full employment. The need for government support for the economy was reemerging at a time when political reaction against the New Deal was at its height and resistance to practically all nonmilitary forms of state intervention was on the rebound. Under these circumstances it is not surprising that government and corporate leaders were attracted to military spending like moths to a light bulb (Du Boff, 1989, p. 98).
Military spending guaranteed high profits to “some of the largest firms in concentrated sectors of the economy [and did] not interfere with or saturate private demand.” It provided hardware and manpower for the global politico-military empire established by the U.S. after World War II—which also created lucrative opportunities to export weapons to client states (Du Boff, 1989, pp. 118-19).(5) By the mid-1950s the ideologies of the “American century” and the Cold War were firmly established. Radicals had been purged from unions and academia, and until the mid-1960s anyone questioning the “higher purpose” of military expenditures (or of highways and other programs in support of the ecologically-and socially-irrational automobilization of American life) was ostracized or worse. In short, the counterrevolution against Keynes was ushered in by the McCarthy-era witch-hunts, repression of organized labor under the Taft-Hartley Act, and the rise of military Keynesianism (Magdoff and Sweezy, 1981, p. 187).
The next counter-revolution was really a “counter-revolution within the counter-revolution,” as the return of stagnation in the mid-1970s (this time accompanied by inflation) instigated a fundamentalist Neoclassical challenge to Neoclassical-Keynesian theory and policy—culminating in the rational expectations and continuous market-clearing models of the New Classical school (Lucas and Sargent, 1981: Sargent, 1986). Rejecting wage and price rigidities as an unjustified deviation from the Neoclassical vision of optimizing agents groping toward market-clearing equilibrium, the New Classicals constructed models in which workers and firms fully anticipate and counteract any real effects of aggregate demand changes that can be predicted on the basis of the model’s structure—including prior information concerning the counter-cyclical policy regime. These models implied that unemployment was a purely voluntary short-run general equilibrium phenomenon. The rise of the New Classical approach, in turn, tended to legitimize other reactionary theoretical tendencies—such as Supply-Side economics which totally ignores effective demand issues and regards all private-sector activity unencumbered by government regulations as socially rational (Glider, 1981). The Neoclassical Keynesians did not respond to these challenges with a return to the fundamental long-run issues opened up by Keynes and Hansen in the 1930s. Instead, the primary “New Keynesian” response was to show how wage and price rigidities may be the outcome of rational behavior based on rational expectations. The possibility of a long-run insufficiency of investment was ignored in order to focus on how such endogenous rigidities and other coordination failures might rescue the short-run counter-cyclical policy-effectiveness propositions of the Neoclassical-Keynesian model (Mankiw and Romer, 1991).
IV. Contemporary Mainstream Views of the Great Depression: Temin’s Analysis
Temin (1976) previously conducted a Neoclassical-Keynesian critique of the Monetarist view under which the primary cause of the Great Depression was the Federal Reserve’s contractionary policies (Friedman and Schwartz, 1965). While pointing out the Monetarist’s inadequate treatment of the demand for money, Temin’s (1976) own analysis stressed an unexplained fall in consumption in 1930. In Lessons from the Great Depression Temin (1990) de-emphasizes this concern with private-sector instability and argues that tight monetary policies caused the Great Depression—although the analysis is more internationally based than Friedman and Schwartz’s (1965). Temin now hypothesizes that World War I was a serious “shock” to the world economy, which was propagated by the deflationary policies dictated by the international gold standard regime. This regime had a deflationary bias because countries with external deficits had to implement contractionary policies to protect their gold reserves, but surplus countries were under no similar compulsion to inflate. Private economic agents were aware of this deflationary bias and behaved accordingly, which placed additional upward pressure on real interest rates and accentuated declines in the demand for goods. Temin concludes that a less deflationary policy regime need not have transformed the World War I shock into global collapse, so that “it was the attempt to preserve the gold standard that caused the Great Depression” (1990, p. 38).
Having blamed the Depression on the gold standard, Temin logically ascribes the recovery to a new, more expansionary regime. The regime shift is traced to the 1933 devaluation of the $US which was accompanied by other policies that, although “not Keynesian,” nonetheless added up to “an aggressive, interventionist, expansionary approach … a multifaceted new policy regime” (Temin, 1990, pp. 97, 107). The private sector responded by revising its deflationary expectations, which “amplified the [expansionary] effects of the devaluation” (Temin, 1990, p. 93). This “reaction to Roosevelt’s new policy regime was immediate,” and buoyed the economic recovery of 1933-37 (Temin, 1990, p. 98). Temin explains the very high unemployment in the U.S. throughout the 1933-37 recovery by: (1) the fact that “only in Germany was the expansionary impulse strong” (1990, p. 105), (2) the prior collapse of investment which caused the capital stock to “run down” so that “[w]ith a smaller stock of capital per potential worker, there were fewer job opportunities”, (3) the “failure of real wages to fall” sufficiently, due to the tendency of “insider” workers to respond to increased unemployment “by accepting lower real wages, but only low enough to preserve the jobs of all those still employed”. The 1937-38 recollapse of the U.S. economy is then blamed on a temporary reversal of the expansionary policy regime.
In Germany the 1933 Nazi takeover also “heralded the presence … of a new policy regime” (Temin, 1990, p. 103). Temin suggests that Nazi and New Deal policies were similar by nature, in that (1) there was a movement toward demand stimulus, (2) the “immediate recovery … was the result of anticipated as well as actual government activities,” and (3) both regimes were conditioned by “an impulse to take control of the economy” based partly on the “view that government could be used as an instrument to help the working man” (1990, pp. 103, 108, 110). This “socialist” regime, which spread to other advanced capitalist countries during and after World War II, had the following properties:
(1) public ownership or regulation of ‘the commanding heights’ of the economy, particularly utilities and banking; (2) heavy government involvement in wage determination; and (3) a welfare state providing everyone with … a social dividend (Temin, 1990, p. 111).
Temin then derives the lessons of the Depression for today from the fate of this socialist regime. He suggests three reasons why recent conservative inroads on the “socialist” elements of the “mixed economy” do not signal a return to pre-Depression conditions. First, the crisis and disorder of the inter-war era necessitated a movement toward socialist controls, which indicates that “[d]isorder breeds socialism.” By contrast, the 1980s upsurge of anti-socialist measures corresponded with the “order” of the “longest peacetime expansion on record,” which suggests that while the “controls of socialism do well when times are bad … they inhibit progress when times are good” (Temin, 1990, p. 133). Second, Temin argues that the welfare state and “social dividend” elements of the socialist regime remain basically unscathed, as social security and medicare have “proved largely immune to attack” (1990, p. 129). It remains the case that “the impact of economic fluctuations on working people has been very much reduced” (1990, p. 132)—so that “[t]here are many parallels between the unemployment of the 1930s and 1980s, but the well-being of the unemployed is not one of them” (1990, p. 135). Third, contractionary macro-policies under “declining world conditions” are now less likely. Since Temin blames the Great Depression on deflationary policies, he suggests that “immunity from future depressions is a function of enlightened short-run policies rather than … long-run changes in the international order” (1990, pp. 135-36).
Temin’s analysis graphically illustrates mainstream Keynesianism’s continued default of the issues raised in the 1930s in the face of the reactionary challenges of New Classical and Supply-Side Economics.(6) The mechanical reduction of aggregate demand to exogenous policy regimes and corresponding private expectations basically combines New Classicism with the Neoclassical-Keynesian emphasis on counter-cyclical policy as a macroeconomic complement to the “invisible hand” of pre-Keynesian economics—to the neglect of the Keynes-Hansen focus on the long-run determinants of investment in an environment of non-quantifiable uncertainty. Temin’s Neoclassical-Keynesian focus on wage rigidities as a cause of the ongoing mass unemployment in the 1930s ignores the linkages between wages and effective demand which are basic to Keynes (1964), while the argument concerning the inadequate number of job opportunities due to a shortage of capital appears to reflect the increased influence of Supply-Side economics on mainstream thinking in recent years.
Even more revealing is the characterization of the 1980s as an era when times were good due to the “order” of the “longest peacetime expansion on record.” Aside from its sheer inaccuracy in terms of the global output and unemployment record of the 1980s, this description exhibits the typical Neoclassical-Keynesian default of any concern with the content of output and employment during a decade when the U.S. economy was characterized by rampant financial speculation, increased poverty and inequality, falling real wages, rising family work-times, and a cyclical recovery driven by massive increases in military outlays and private debt. True, Temin does conduct some contradictory posturing on the U.S. policies of the 1980s, as when he refers to the “profligate macroeconomic policies introduced under Reagan” as a trend “that might imperil the world economy” (1990, p. 136). But nowhere is it explained how these clearly stimulative macroeconomic policies contradict the expansionary “socialist” regime purportedly initiated in the 1930s, nor how they could endanger the world economy.
The technocratic nature of Neoclassical-Keynesianism is reflected in the notion that 1930s German and U.S. policies had similar elements comprising a common “socialist regime.” Nazi policies were implemented over the corpses of organized labor and social democracy. What allowed the Nazis “to overcome the reluctance of big business to large-scale government intervention” (Kalecki, 1972, p. 100) was not the “view that government could be used as an instrument to help the working man” (Temin, 1990, p. 108), but rather the assurance that “the purely capitalistic mode of production [would be] guaranteed by directing the increased government expenditures to armaments” instead of social investment or workers’ consumption (Kalecki, 1972, p. 100). Despite minor conflicts between big business and the Nazi regime, the relationship was on the whole “mutually satisfactory, and it grew in strength over time” (Gillingham, 1985, p. 32). This is what fascism is all about. By contrast, the twists and turns of 1930s U.S. government policies were driven largely by the explosion of intra-capitalist conflicts (between small and big business especially) and of the working class in response to the totally ineffective regulatory measures implemented under Hoover and the initial phases of the New Deal (Milton, 1982; Levine, 1988). Temin does not even mention the upsurge of organizations of the unemployed—which eventually became “a real mass movement … which demanded concrete, effective measures to redress what had become an intolerable situation for literally tens of millions of people” (Sweezy, 1981, p. 145); neither is there a word about the tremendous struggle of industrial workers to organize their collective power. Finally, nothing about how in the wake of the 1937 downturn and mounting capitalist and red-baiting opposition to both the New Deal and the upsurge of organized labor, FDR’s reform process was basically stopped dead in its tracks. One could read Temin and not become aware that this was “arguably the highwater mark of the class struggle in modern American history” (Davis, 1986, p. 54). Only by ignoring the class basis of state policies is it possible to characterize New Deal developments in terms of the smooth evolution of an expansionary regime that emerged in 1933.
V. The Neo-Marxian Perspective and the Great Depression
As we’ve seen, although the General Theory was profoundly subversive of the received wisdom that interest rate adjustments could automatically equilibrate saving and investment at full employment, its expression in terms of short-run equilibrium analysis later helped legitimize its submergence under the Neoclassical-Keynesian synthesis model—i.e., “a set of clever recipes to counteract the ups and downs of the business cycle” (Magdoff and Sweezy, 1987, p. 45). Keynes’ concern to show the possibility of a short-fall of investment relative to full-employment savings under free competition also drew attention away from the relevance of the “micro” problem of monopoly for the “macro” problem of aggregate long-term investment.(9) However in the 1930s Kalecki (1935) was initiating an alternative analysis that integrated the role of monopoly, and which led to a radical reinterpretation of the historical issues raised by the 1930s stagnation debate. Based on Marx (1967), Kalecki interpreted the problem of effective demand in terms of the realization of profits extracted from workers. If workers consume all or most of their wages, and profits are to a much greater degree saved—both by individual capitalists and via firms’ retained earnings—then maintenance of the current level of profits depends on a level of investment sufficient to realize the unconsumed profits. Even if such investment is initially forthcoming, the resulting increase in the capital stock can place downward pressure on investment. Moreover, an increasing degree of monopoly in the economy—due to growth of labor productivity relative to money wages and the spread of monopolistic pricing arrangements—will increase the amount of potential profits to be realized. The dependence of the capitalist economy on increasing autonomous investment was thus rooted in the internal competitive and class dynamics of the capital accumulation process.
Steindl (1952) developed Kalecki’s theory by showing how under freely-competitive capitalism, periods of boom and overproduction were followed by downturns which “corrected” prior imbalances via falling prices, scrapping of productive capacity, and liquidation of less-efficient enterprises. But this process led to a concentration and centralization of capital into monopolistic units which had sufficient efficiency and productive capacity to inflict large losses on competitors in price wars. Such monopolistic firms implicitly or explicitly agreed to maintain relatively rigid price/cost mark-ups in the face of effective-demand fluctuations. Recessions now led primarily to rising excess capacity rather than the demise of marginal firms, a tendency that was reinforced by firms’ maintenance of a margin of unutilized capacity to ward off potential new competitors. Excess capacity, in turn, caused a stagnation of induced investment. Corporations competed via production innovations, but these could be financed mostly from depreciation funds—especially with capital-saving technological advance.
Baran and Sweezy (1966) emphasized the role of major wars and “epoch-making innovations” as counters to investment stagnation under mature capitalism. Major wars and reconstructions temporarily increase the autonomy of investment from wage-based demand. After World War II this autonomy was augmented by the enormous peacetime military outlays of the U.S. government, and by the opening up of global markets and “spirit of optimism” among competing capitals which developed under U.S. hegemony (Sweezy, 1984). As in Hansen’s “great new industries,” epoch-making innovations “shake up the entire pattern of the economy and hence create vast investment outlets in addition to the capital which they directly absorb.” However, it is possible that “the availability of new industries as outlets for accumulation … becomes relatively less important as the system develops” (Baran and Sweezy, 1966, p. 219; Sweezy, 1954, p. 532). Since the railroad and automobile were associated with an expansion of capitalism at the expense of its domestic non-capitalist environment, there may be less opportunities for such epoch-making transformations in the future—and the expansionary impulses of innovations may become more directly constrained by the distribution of purchasing power between wages and profits.
Baran and Sweezy (1966) also analyzed the limits of other outlets for investible surplus in the absence of major wars and epoch-making innovations. Foreign investment is one such outlet, but for the domestic economy this may be offset by repatriated profits. For the global economy, foreign investment cannot be a permanent solution to stagnation—especially since the capital-absorbing capacity of peripheral economies is constrained by the structure of imperialist underdevelopment. Corporate sales and managerial efforts also may absorb surplus, but for a given price structure this is limited by competition among firms. If advertising and other overheads are passed on as higher prices, or if the corporate salariat has a higher saving propensity than production workers, the positive impact on effective demand and capacity utilization is diminished (Baran, 1959). Financial activities provide another potential, but contradictory, offset to the stagnation tendency. What emerged from all this was a Neo-Marxian perspective “viewing the entire path of accumulation from 1929 to [the present] as an internally consistent process of mature capitalist development” (Foster, 1983, p. 178). While developing the 1930s concern with secular stagnation, this perspective suggests that the various crises of socio-economic reproduction under mature capitalism—including many of our apparently “personal” and “supply-side” problems—can be traced largely to wasteful and destructive modes of surplus absorption according to the priorities of capital accumulation (Magdoff and Sweezy, 1981, p. 175).
The Inter-War Era Revisited
The present view of the 1920s global political economy differs from Temin’s, in that the latter neglects how restoration of the gold standard was connected with the capitalist reaction to the Russian Revolution and the global upsurge of organized labor during and after the war. The post-war inflations involved intense class conflicts over distributive shares and the terms on which stabilization would occur. Restoration of the gold standard reflected capital’s largely successful efforts to clamp down on the working class once the chaotic conditions associated with rapid inflation—including the exhaustive demands of the wage-price spiral on workers’ organizations—enabled it to gain sufficient support for its own brand of stabilization (Maier, 1975; Burdekin and Burkett, 1992; Burkett and Burdekin, 1993). Naturally this involved consolidation of state power by right-wing bourgeois parties—or conservative tendencies within social-democracy—favoring “orthodox” macroeconomic policies. The working out of this class struggle cycle was affected by national socio-economic and political conditions, but the key point is that subordination of the domestic market under the gold standard was bound up with the temporary resolution of the struggle on capitalist terms (Devine, 1992). In the more export-dependent European economies, the resulting combination of deflationary policies and strict control of productivity-adjusted wages eroded their domestic markets. This, along with the rising importance of U.S. export operations, intensified international competition which, in turn, encouraged the ongoing concentration and centralization of capital—monopolization and hence more rapid growth of potential surplus value—as reflected in the mid-1920s “rationalization” movement in Germany (Garber, 1982; Steckel, 1990). The “creeping protectionism” of the 1920s was at least partly due to intensified competition among increasingly large-scale capitalist enterprises, as German firms, for example, moved to recoup markets lost during the war. These and other developments created a contradictory situation where rapid growth of the less trade-dependent U.S. economy was “a strategic determinant of world aggregate demand in a period of slow European recovery from the devastation of World War I” (Devine, 1983, p. 12).
The world economy was becoming more dependent on U.S. growth at the very time when overaccumulation was rendering such growth increasingly problematic. Stagnation had first appeared in the U.S. shortly after the Great Merger Movement of 1898-1902, as the “business component of gross private investment … was flat from 1908 through 1921” despite the World War I recovery due to “the frantic demand for war supplies from France and Britain” (Du Boff, 1989, p. 72). The post-World War I investment boom, led by “electrification and automobiles [which] provided the key investment outlets that … overrode the depressive tendencies of the oligopolistic investment mode,” was marked by growing unutilized capacity in industry (Du Boff, 1989, pp. 81-82, 86).(10) Although real wages were rising, labor productivity was rising faster—increasing the share of investible surplus in total corporate income at the same time that capital-saving innovations were reducing effective investment demand by raising the output/capital ratio (Dumenil, et al., 1987, pp. 354-55; Devine, 1988). Real private fixed investment “dropped off after [its] 1926 peak; through 1929 gross investment declined 8.5 percent, net investment by 27.6 percent” (Du Boff, 1989, p. 81).(11) As the autonomous investment boom reached the limits imposed by wage-based demand, aggregate demand became more and more dependent on continued growth of speculatively-derived incomes—especially from real estate and the stock exchange—which was unsustainable in the long run. Hence, while recognizing the role of the speculative collapse and associated fall of consumption in triggering the Great Depression, the Neo-Marxian perspective suggests that such proximate causes were ultimately rooted in the long-run tendency of the system to accumulate more surplus value and productive capacity than it can profitably invest and utilize.
Anyone grappling with the 1930s U.S. economy must address the question: “Why was the recovery cut short when business activity was still considerably below the full-employment level” (Gordon, 1961, p. 440)? I agree with Temin that the New Deal was insufficiently expansionary, but if a new regime was in place the violence of the 1937 downturn is puzzling, given that the temporary policy reversals should have had “little impact because they represent[ed] exceptions to the policy rule, not new policy regimes” (Temin, 1990, p. 91). It seems contradictory to argue that a new expansionary regime caused a recovery which was then terminated by contractionary policies. Furthermore, there is no evidence of a shortage of fixed capital during the 1933-37 recovery, nor that this recovery was anything but “a minor cycle against a background of a deficiency of long-term investment” (Gordon, 1961, p. 444). Not only was the failure of investment to recover the main object of debate in the mid-to-late 1930s (Section II), but the 1937 downturn occurred when industrial capacity utilization was only slightly above the lowest rate of the 1923-29 period (Foster, 1984, p. 205)—”in the context of a continuing drawing down of the real gross equipment stock that lasted until 1939″ (Vatter and Walker, 1990, p. 107; see Musgrave, 1992, p. 122). Real net private fixed investment, both total and non-residential, was negative throughout the 1930s except for a slightly positive showing in 1937 (U.S. Department of Commerce, 1986, p. 225).
The real barrier to reduced unemployment was the inability of the system to utilize its potential surplus for productive investment. The data indicate that the 1933-37 upturn was characterized by an increased share of profits in total income.(14) With a huge overhang of excess capacity from the 1920s and from the 1930s replacement investment, this created a drag on capital accumulation as investible surplus value rose relative to profitable investment opportunities.(15) Any decrease of real wages during the 1933-37 recovery would have reduced effective demand and capacity utilization, and thus made the recovery of investment and employment even weaker than it was. Although the German recovery was also characterized by an increased share of profits in total income, the rising surplus was in this case more fully utilized via large increases in military-related investment and government purchases in the movement toward full-scale war economy (Kalecki, 1972, pp. 72-73). Temin (1990, pp. 114ff) records these aspects of the Nazi regime, but he does not draw the logical implication: that Germany’s much more robust industrial recovery is due to the fact that more than expansionary monetary policy was required to overcome the problem of overaccumulation and stagnation.(16)
The Relevance of the Great Depression Today
Unlike Temin’s (1990) arguments concerning the “order” of the “longest peacetime expansion on record,” the Neo-Marxian perspective focuses on the resurgence of conservative socio-economic policies in the wake of the two worst cyclical downturns since the Great Depression (in 1974-75 and 1980-82), super-imposed on a secular slowdown of capital accumulation on a global scale. The 1980s recovery was not robust, as investment, output growth, and capacity utilization rates in the developed capitalist countries were in general well below those experienced in previous post-World War II expansions (Sweezy and Magdoff, 1992(a), pp. 7-9). The initiating and leading role of consumption in the current weak recovery of the U.S. economy suggests the same laxity of autonomous investment (domination of net investment trends by accelerator effects) that Hansen cited as a symptom of stagnation in the 1930s.
Corporate capital and the state have responded to the stagnation of profitable and productive net investment opportunities by (1) attacking the living standards of the working class, as reflected, in the U.S., by declining real wages alongside large increases in output per worker since the late-1970s (Magnet, 1992, pp. 60-61), and (2) removing regulatory, trade-union, and other barriers to the restructuring and mobility of industrial and financial capital—including the reallocation of investible surplus value toward finance-related activities. Similar to the post-World War I period, these responses seem to be grounded in capital’s re-assertion of its economic, political, and social control in the context of an organizational weakness of the working class and the social irrationality of capitalist competition—under which an excess of productive capacity forces individual enterprises, and nations, to intensify the exploitation of their workers despite the fact that this accentuates the macro-problem of overaccumulation (Foster, 1989). The class character of state policies is especially clear in the U.S., where “non-entitlement” welfare-state programs have been slashed alongside reductions in taxes on various profit incomes. Workers pay a higher share of taxes, while profit income gains from both sides of the federal budget equation: first from lower taxes, then from interest on the burgeoning government debt (Pechman, 1990; Michl, 1991). Unemployment compensation has been a main target of the conservative reaction in the U.S.—the purpose of the cuts, more-or-less ideologically stated, being to force the unemployed to more quickly accept low-wage jobs, and to lower the bargaining power and facilitate intensified exploitation of the currently employed (Economic Notes, 1991(a,b); Oravec, 1992). All this contrasts with the New Deal which, although unsuccessful in stimulating a full economic recovery, instituted meaningful reforms as FDR steered the working-class upsurge “into what were from capitalism’s point of view safe waters”(Sweezy, 1981, p. 146).
Similar to the 1920s, overaccumulation and the conservative reaction have reinforced the dependence of aggregate demand on debt and other financial activities. Debt dependence and short-run speculative motives have penetrated every nook and cranny of the U.S. economy, as shown by recent record levels of interest income, and of consumer, mortgage, and corporate debt relative to total income (Magdoff and Sweezy, 1987; Friedman, 1988; Pollin, 1990). By the mid-1980s the net capital stock in U.S. manufacturing activities was smaller than the net capital stock employed in finance-related activities (Magdoff and Sweezy, 1990). Alongside the tremendous growth of financial speculation, corporate debt and leveraged buy-outs, etc., the internal funds of U.S. corporations were sufficient to cover 94.6 percent of corporate investment in plant and equipment during the 1980s (Dymski et al., 1992, p. 2). Government policies—military outlays, financial deregulation, and the lender-of-last-resort actions of the Federal Reserve—have played a crucial role in sustaining finance-led accumulation. But in doing so they have worsened income inequality and further encouraged financial speculation, thus accentuating the imbalance between growing debts and the underlying stagnation of profitable and productive outlets for investible surplus (Guttmann, 1984; Sweezy and Magdoff, 1988).
Any analysis of the 1990s regime must address three potentially-problematic areas. First, the 1980s build-up of U.S. government debt, and the end of the Cold War, now constrain the government’s ability to apply military-Keynesian stimuli to counter future cyclical downturns. (The financing of expanded civilian outlays with significant taxes on capitalist income and wealth is not even under consideration, since this would conflict with the power of “the markets”—to use one of Clinton’s favorite terms—as well as with the ideologies of Supply-Side economics and “competitiveness”). Second, financial deregulation and bail-outs have been increasingly formulated in reactive fashion “in order to ease strains and overcome potential breaking points associated with financial excesses,” lest the speculative bubble be burst (Magdoff and Sweezy, 1989, p. 3). The reactive character of financial policy, and its susceptibility to corruption and political opportunism, are evident in the bi-partisan shenanigans surrounding the savings and loan mess. Subordination of the state’s regulatory function to its lender-of-last-resort function, enacted partly via behind-the-scenes wheeling and dealing, is not indicative of a stable policy regime. Rather, it suggests that this regime is largely endogenous with respect to a process of financial speculation which can only be destabilizing in the long run.
Third, the current period, like the inter-war era, is characterized by the lack of a single hegemonic economic power in the world capitalist system, as U.S. dominance has been challenged by Japan and Western Europe, especially Germany.(19) The collapse of the Bretton Woods system of $US-based exchange rates and the rise of the German mark and Japanese yen as international currencies have corresponded to extreme exchange rate fluctuations and tremendous movement of short-run capital between countries. Even long-term capital flows—direct foreign investments by transnational firms—have moved increasingly into finance-related areas (Sweezy and Magdoff, 1992(a), pp. 13-18 and 1992(b), pp. 1-11). A recent article in the quarterly Review of the Federal Reserve Bank of St. Louis provides some indications of the magnitude of this explosion of cross-national financial activity:
For example, cross-country activity, when measured as the volume of foreign transactions in securities of U.S. firms (aggregate purchases and sale) grew from $75.2 billion in 1980 to $361.4 billion in 1990. Similarly, U.S. transactions in securities of foreign firms (aggregate purchases and sales) grew from $17.85 billion to $253.4 billion between 1980 and 1990. In futures and options markets, 20 new exchanges were established worldwide between 1985 and 1989, bringing the total to 72. Likewise, nearly 40 million futures and options contracts were traded worldwide in 1988, an increase of approximately 186 percent since 1983. Eurodollar interest rate futures saw an especially large change, increasing almost 70 percent annually between 1983 and 1988 (Scarlata, 1992, pp. 17-18).
Such phenomena are hard to justify as a rational allocation of financial and non-financial resources; they more likely reflect the overaccumulation of investible surplus value in an international economy in which the “rules of the game” for policymakers are increasingly unclear. They also suggest that the dependence of accumulation on potentially-destabilizing financial activities is much more global in scope and internationally interdependent than in the pre-Depression period. Moreover, this financial explosion, largely outside the bounds of government regulations, is operating in the atmosphere of a resurgent free-market, supply-side ideology that “is clearly reminiscent of the economic orthodoxy which Keynes railed against in 1936” (Tobin, 1989, p. 10). This ideology basically views speculative activity, fiscal-monetary stringency, and the determination of social policies and workers’ living conditions by the demands of international competitiveness as the solution to the long-run crisis of capitalism. In the real world, any socially-rational stabilization of the international economy must impose serious constraints on capital’s control over the utilization and allocation of productive capacity and investible surplus value.
VI. Conclusion: Recapturing the Lessons of the Great Depression
The theme of this paper is the lack of historical memory in mainstream thinking concerning the meaning of the Great Depression and its lessons for today. The ideological significance of Temin’s analysis can be understood in light of the smothering of the 1930s debate under the Cold War and military Keynesianism and the resurgence of supply-side ideologies when the “Golden Age” of the post-World War II boom under U.S. hegemony came to an end. Mainstream economics has abandoned the issue of how to achieve a socially-rational utilization of the tremendous surplus the economy can produce at full employment. The Neo-Marxian approach, building upon and developing the systemic questions raised in the 1930s, detects parallels and differences between our current situation and the inter-war era which escape mainstream analysis—including the contradictions of the 1990s policy regime.
The current dominance of supply-side ideology and the failure to approach a socially-rational response to the ongoing crisis suggest a near-complete vacuum of historically-informed far-sightedness among the ruling class, orthodox economists and policymakers. As Du Boff notes:
The more astute members of the capitalist class may be well aware of the potential costs of high unemployment, excess capacity, and a recession that could spin further downward and set off a financial breakdown. The priority, however, is to maintain control over the profit-making environment and to keep unwelcome incursions into it bottled up. Prices and wages, labor discipline, technological change, product development and marketing, and industrial location all are determinants of profit and as such must be controlled or predominantly influenced by corporate capital. At the same time, aggregate demand must be bolstered by government macropolicies and institutions. But when the two collide, aggregate demand and full employment must give way, at least for what the policymakers trust will be the short run (1989, p. 125).
Without a working-class movement capable of reversing “the existing power equation” by a combination of “popular discontent and public power,” state policies will be driven by the imperatives of “business confidence” (Du Boff, 1989, p. 186). Given the current political weakness of the working class, this issue cannot be reduced to a choice between conservative reaction and the immediate establishment of democratic socialism. But in a situation where the ruling class and its ideologues have forgotten the real lessons of the Great Depression, the main initiative toward meaningful measures to deal with the ongoing crisis will have to come from a new upsurge of the working class. This movement will by necessity recognize that the long-run crisis of capitalism cannot be solved by any “regime” remaining within the current confines of capital’s socio-economic power. The solution involves “bringing social production under social control” (Clarke, 1988, pp. 359-60) in order to maintain and utilize productive capacity for the satisfaction of the individual and collective needs of the entire global society. Whether in this process any enlightened initiatives will emerge from the ruling class and mainstream economics, and the role which such tendencies will play, cannot be determined a priori. As Paul Sweezy observes:
The basic disease of monopoly capitalism is an increasingly powerful tendency to overaccumulate. At anything approaching full employment, the surplus accruing to the propertied classes is far more than they can profitably invest. An attempt to remedy this by further curtailing the standard of living of the lower-income groups can only make things worse. What is needed, in fact, is the exact opposite, a substantial and increasing standard of living of the lower-income groups, not necessarily in the form of more individual consumption: more important at this stage of capitalist development is a greater improvement in collective consumption and the quality of life … It follows that there is at least the objective basis for a cross-class alliance between those who suffer most from the system’s crisis and the more far-seeing elements of the ruling class. This is similar to the situation that existed in 1933 and gave rise to the New Deal. But history never really repeats itself, and there is no need to assume that such an alliance would take the same form as it did half a century ago. The workers were very much the junior partner then. Do they have to be this time as well? The answer, in my opinion, depends not on logic or theory but on what actually happens in the course of the struggle. And that, I think, is not only what we cannot predict but should not try to predict. Better to join the struggle and try to affect its course. Not only the people of the United States but the peoples of all the world have an enormous stake in the outcome (Sweezy, 1981, p. 148).
This is the primary lesson we should draw from the Great Depression.
1) See Wesley C. Mitchell’s “Review” in President’s Research Committee: “To deal with the central problem of balance, or with any of its ramifications, economic planning is called for. At present, however, that phrase represents a social need rather than a social capacity” (1934, p. xxxi).
2) Keynes (1937) was also concerned with the question of long-run stagnation in mature capitalist economies. However, the General Theory is somewhat ambiguous on this issue, and there are passages which seem to indicate that long-run stagnation is only relevant for the future, that is, after the short-run business cycle had been tamed by expansionary monetary and fiscal policies. Keynes’ projected “euthanasia of the rentier” (1964, p. 376) is located in this futuristic context. Moreover, even where Keynes discusses stagnation tendencies it is not always clear whether his analysis is limited to the British case. Hence during the late 1930s and 1940s there was much controversy over whether the General Theory contained a long-run stagnation perspective (Guthrie and Tarascio, 1992). However, there is no doubt that the General Theory initially imparted scientific and ideological legitimacy to investigation of secular stagnation issues.
3) The irony of the economics profession’s abandonment of the stagnation issue under the cover of military Keynesianism was noticed early on by Hansen: “In the kind of world now in prospect, the problem of stagnation assumes a quite different aspect … Indeed even in 1949, with a federal budget of about $40 billion, half of which was for national security, the situation was obviously not at all like the peacetime conditions prevailing in the thirties before the Second World War. It is amazing how many economists have been able to close their eyes and blandly announce that events since 1940 have disproved the stagnation thesis!” (1954, p. 409)
4) This failure to “discuss what employment should be for” is what Joan Robinson refers to as the “second crisis of economic theory”—the first crisis being “the breakdown of laissez faire in face of the problem of effective demand” (1972, pp. 6, 8).
5) It is important to recognize that “since the end of the first postwar business cycle in late 1948, only increases in military spending have been able to push the official unemployment rate below the 4 percent ‘full employment’ mark” (Du Boff, 1989, p. 101). The cyclical expansion of 1945-48, driven by “a huge pent-up demand, following sixteen years of depression and wartime shortages,” was quickly followed by a downturn that was only ended by the Korean War (Du Boff, 1989, pp. 95-96). The problem of excess productive capacity re-emerged in the years 1953-61, when business fixed investment was basically flat and military spending was the main factor preventing a relapse into really serious stagnation (Du Boff, 1989, pp. 100-101; Hansen, 1964, pp. 23-34).
6) Temin’s analysis is representative of the mainstream trend. The recent “Symposium” on the Depression in the American Economic Association’s Journal of Economic Perspectives (Romer, et al., 1993), and Eichengreens’ (1992) survey of work on this issue do not even mention the work of Alvin Hansen. In its most reactionary form this literature denies that inadequate aggregate demand had anything to do with the ongoing mass unemployment of the mid-1930s. Jensen (1989, p. 573), in a widely-cited article, suggests that unemployed workers were not hired in the mid-1930s because they were inadequately trained, and that expansionary fiscal policies could not have lowered unemployment below the “natural” rate of 10 to 15 percent!
7) This inaccuracy is striking in light of Richard Layard’s Foreword to Temin’s book which clearly locates Temin’s analysis in the context of renewed stagnation in the global capitalist economy: “Europe today is in the biggest recession since the 1930s, with unemployment over 10 percent. The position of the debt-ridden countries of the Third World is still worse. In consequence the world economy has grown more slowly in the 1980s than in the rest of the postwar period” (Temin, 1990, p. ix). Similarly Tobin refers to the “persistence outside North America of high unemployment rates and of stagnation in the 1980s” (1989, pp. 7, 10).
8) The criticism of U.S. fiscal policy as “profligate” is curious given that the cyclical recovery of the U.S. economy in the 1980s—buoyed largely by rising government deficits—prevented European stagnation from being more catastrophic than it was. “In reality, at the base of the small or large increase in demand that has been recorded in Europe in the 1980s, there have been direct or indirect spillover effects arising from the growth in American demand” (Tobin, 1989, p. 8).
9) Hence while economists like Chamberlin and Joan Robinson were busily building micro theories of monopolistic competition in the early 1930s, the possibility that the development of monopolistic corporations might have created an endogenous long-run overaccumulation and stagnation tendency was unattended in mainstream theory. Indeed, “when it came to the interpretation of the larger dynamics of the Depression, Chamberlin spoke entirely without reference to his own preoccupations in the field of microeconomic price mechanisms” (Stoneman, 1979, p. 49). Chamberlin (1934) blamed the severity of the 1929-33 collapse and the weaknesses of the subsequent recovery on supply-side factors such as “artificially high wages.”
10) Contemporaries were aware of this overaccumulation of productive capacity (Du Boff, 1989, pp. 85-87). However, in the heady atmosphere of the 1920s it was conceived primarily in terms of cyclical and/or sectoral mal-adjustments, and it was widely felt that further refinements of private-monopolistic and quasi-governmental regulatory measures would be sufficient to deal with the problem. See the excellent discussions in Stoneman (1979, pp. 21-25) and Sklar (1992).
11) Gordon states that “the rise in output of durable goods in 1928-29 was too rapid to be long maintained. Excess capacity was developing in a number of lines, and this meant a decline in demand for further capital goods” (1961, p. 426).
12) As in the 1980s, the boom of speculation also involved a new merger wave accommodated by the lax anti-trust policies of conservative Republican administrations, and “[b]y the late 1920s most mergers appear to have been inspired by professional promoters and investment bankers, taking advantage of the feverish demand for corporate securities” (Du Boff, 1989, p. 79).
13) The role of the collapse of the “speculative mania of 1927-29” in triggering the Depression is stressed by Schumpeter (1946) and Gordon (1961, pp. 408-10, 418, 427).
14) The profit share’s large increase during 1933-37 is evident under both standard NIPA and Marxian definitions of profit (U.S. Department of Commerce, 1986, p. 46; Dumenil, et al., 1987, p. 351). To the extent that investible surplus value was not invested, the ex-post data understate the growth of potential surplus value relative to profitable investment outlets.
15) Gordon says that during the 1920s “[c]apital goods were created which were to ‘hang over the market’ and discourage further investment for a decade after 1929” (1961, p. 418). During the 1933-37 recovery “[b]usiness displayed a notable unwillingness to undertake long-term investment projects, either in new directions or in those lines that had chiefly attracted investment funds in the 1920s. The fact that equipment expenditures made a better showing than business construction suggests that firms were willing to make capital expenditures only as necessary to replace and modernize equipment and to meet relatively minor changes in demand” (Gordon, 1961, p. 436; see also Vatter and Walker, 1990, pp. 107-109). The idea that output and employment were constrained by a shortage of fixed capital during the 1930s seems especially far-fetched when one considers the tremendous increase of production, employment and realized corporate profits (with relatively little new net investment) that occurred immediately thereafter in the mobilization for World War II (Baran and Sweezy, 1966, pp. 242-43).
16) Temin’s (1990) analysis implies that a clear commitment to monetary expansion should have been sufficient to attain a full recovery of the U.S. economy during the 1930s. However, it is doubtful whether financial constraints were a primary impediment to investment during the 1933-37 recovery (Gordon, 1961, p. 438). Interest rates remained extremely low even after the Federal Reserve’s doubling of reserve requirements between August, 1936 and May, 1937 (for details see Brockie, 1950, pp. 293-96). See also Hart (1938) for a detailed analysis indicating that it was the insufficiency of investment opportunities in an environment of excess capacity that underlay both the ongoing debt problems of the 1930s and the corresponding role of government debt as a primary outlet for rising savings during the 1933-37 recovery.
17) Temin’s (1990) focus on entitlement programs like social security and medicare—which are not progressively redistributive in a class sense—clearly leads to an underestimation of the degree to which the U.S. “socialist” regime has been dismantled in recent years.
18) Financial innovations and the developing links between the payments system and speculative markets have repeatedly forced the Federal Reserve to extend bail-out operations to non-bank speculative activities—commercial paper (the 1970 Penn Central crisis), commodity exchanges (the silver crisis involving the Hunt brothers, 1980) and the October 1987 crash on the stock exchange and index-futures markets (Brimmer, 1989). Further expansions of the Fed’s “bail-out locus” appear likely. A well-known problem area is the life-insurance business; another potential one involves the relatively-unregulated finance companies which have recently grown rapidly and are linked with the banks via the commercial paper market (D’Arista and Schlesinger, 1993).
19) Temin’s downplaying of this factor is a step backward relative to Kindleberger (1986). Temin’s (1990, pp. 36-37) argument is that international dominance by a single capitalist power would have made no fundamental difference in the inter-war era, since the real problem was the deflationary policy regime, nor any conflicts within this regime. This argument implicitly contains two joint hypotheses: (1) that a new regime was necessary for recovery, and (2) that a new global hegemony (e.g., of the United States) was not a necessary condition for establishment of a new regime. Hence Temin bypasses what would appear to be Kindleberger’s main point: a single dominant hegemon may have been required to enforce implementation and reproduction of a new, less-deflationary regime, and the internal and external conditions for the U.S. to play this role were not fully established until near the end of World War II.
20) In a recent Presidential Address to the American Economic Association that must have shocked his Neoclassical audience, William Vickrey—an old-line Keynesian who worked in the New Deal administration—argued that the number one problem for U.S. capitalism is how to “recycle the private savings” that the economy generates near full employment. However, while Vickrey, like Keynes, believes that this problem can be rationally solved “while preserving the essentials of a free-market system” (1993, p. 10), the historical evidence suggests that the relations of exploitation, competition, and political power in the mature capitalist society will have to “give room to a higher state of social production” (Marx, 1973, p. 750) before this task can be fulfilled.